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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 1-14280
HOST FUNDING, INC.
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(Exact name of Company as specified in its charter)
Maryland 52-1907962
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6116 N. Central Expressway, Suite 1313, Dallas, Texas 75206
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(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code 214-750-0760
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act.
Class A Common Stock - $0.01 par value
(Title of Class)
Indicate by check mark whether the Company (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained to,
the best of the Company's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
Company (totaling 907,637 shares) was $6,013,095 (based upon the closing bid
of the Company's common stock on the AMEX on February 26, 1998 of $6.625 per
share). The term affiliates is deemed, for this purpose only, to refer only
to directors, officers and principal stockholders of the Company.
Indicate the number of shares outstanding of each of the Company's classes of
common stock, as of the latest practicable date.
The number of outstanding shares of the Company's Class A Common Stock was
1,553,557 as of February 26, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Proxy Statement for the 1998 Annual Meeting of Stockholders to be
held June 25, 1998.
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TABLE OF CONTENTS
<TABLE>
ITEM PAGE
NUMBER NUMBER
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PART I
1. Business........................................................... 3
2. Properties......................................................... 9
3. Legal Proceedings.................................................. 11
4. Submission of Matters to a Vote of Security Holders................ 11
PART II
5. Market for Registrant's Common Equity and
Related Stockholder Matters ....................................... 11
6. Selected Financial Data............................................ 13
7. Management's Discussion and Analysis of Financial Condition
and Result of Operations .......................................... 13
7A. Quantitative and Qualitative Disclosures About Market Risk ........ 21
8. Financial Statements and Supplementary Data........................ 21
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ............................ 22
PART III
10. Directors and Executive Officers of the Registrant................. 22
11. Executive Compensation............................................. 22
12. Security Ownership of Certain Beneficial Owners
and Management .................................................... 22
13. Certain Relationships and Related Transactions..................... 22
PART IV
14. Exhibits, Financial Statements, Financial Statement Schedules
and Reports on Form 8-K ............................................ 25
</TABLE>
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PART I
ITEM 1. BUSINESS
OVERVIEW
Host Funding, Inc. (the "Company") was incorporated in the State of
Maryland in December, 1994 and was inactive from inception to March 31, 1995.
On April 1, 1995, All American Group Ltd., a Delaware limited partnership
("AAG"), and the Company entered into a Contribution and Assumption Agreement
pursuant to which AAG transferred, assigned and conveyed to the Company all
of the real property including land, personal property, and loan fees of four
Super 8 Motels located in Somerset, Kentucky; Miner, Missouri; Poplar Bluff,
Missouri; and Rock Falls, Illinois (the "AAG Hotels"). The Company's Class A
Common Stock began trading on the American Stock Exchange on April 22, 1996,
the date of the initial public offering. Simultaneously with the initial
public offering, the Company acquired a Super 8 Motel located in San Diego,
California (the "San Diego Super 8"). The AAG Hotels and the San Diego Super
8 are herein referred to as the "Initial Hotels".
The Company is engaged in the business of acquiring high quality,
limited-service and full service hotels throughout the United States which
are affiliated with national or regional hotel chains. Although the Company
is structured as a real estate investment trust ("REIT"), it has not yet
elected REIT status under the Internal Revenue Code. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations."
Since the commencement of Company operations and the acquisition of the
Initial Hotels, the Company has formed wholly-owned subsidiaries for the
purpose of owning the Initial Hotels and acquiring additional hotel
properties. Unless the context otherwise requires, references to the Company
herein include the Company and its subsidiaries.
BUSINESS DEVELOPMENT
In September, 1996 the Company formed CrossHost, Inc., as a
wholly-owned, special purpose subsidiary of the Company ("CrossHost"). Upon
formation, CrossHost acquired four Sleep Inn Hotels located in Destin,
Sarasota and Tallahassee, Florida and Ocean Springs, Mississippi, pursuant to
an acquisition and credit facility provided by Credit Suisse First Boston
Capital, LLC ("First Boston"). In addition, the Company transferred to
CrossHost the Initial Hotels.
On March 14, 1997 the Company formed Host Ventures, Inc., as a
wholly-owned, special purpose subsidiary of the Company ("Host Ventures").
Upon formation, Host Ventures acquired a 90 room Super 8 Hotel located in
Flagstaff, Arizona, pursuant to an acquisition and credit facility provided
by First Boston. In addition, CrossHost transferred to Host Ventures the
Sleep Inn Hotels owned by CrossHost and located in Ocean Springs, Mississippi
and Sarasota, Florida.
On October 21, 1997, the Company completed the purchase of two
Country Hearth Inn hotel properties (the "Country Hearth Inns") located in
Auburn, Indiana and Findlay, Ohio consisting of 150 rooms. The Company
completed the purchase by forming two special purpose limited
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partnerships with Buckhead America Corporation, a publicly-traded hotel
company ("Buckhead"), of which the Company is the beneficial owner of
approximately 80% of the limited partnership interests and a 1% general
partnership interest in each limited partnership. Buckhead beneficially owns
approximately 19% of the remaining limited partnership interests in each
limited partnership.
As of December 31, 1997, the hotel property portfolio of the Company
consisted of 12 hotels located in 9 states consisting of approximately 922
rooms. Unless the context otherwise requires, the hotel properties owned by
the subsidiaries of the Company are herein referred to as the "Company
Hotels".
MANAGEMENT OF HOTELS
Excluding the two Country Hearth Inns, which are leased, managed and
operated by Buckhead pursuant to separate lease agreements, the Company
Hotels are leased to Crossroads Hospitality Tenant Company, LLC
("Crossroads"), as lessee, and are further subject to Master Agreements among
the Company, Crossroads and Crossroads Hospitality Company, LLC ("Crossroads
Hospitality"). Each of Crossroads and Crossroads Hospitality is controlled by
Interstate Hotels Corporation, a publicly held, nation wide operator and
manager of hotel properties. Crossroads does not lease, manage or operate any
hotels other than those owned by the Company. The Company has agreed in
principle with Crossroads to terminate, during the second quarter of 1998,
all of the lease agreements, including the Master Agreements, relating to
Company Hotels leased by Crossroads. Subject to the termination of the lease
agreements and related Master Agreements, the Company has also entered into a
letter of intent to enter into new lease agreements or management agreements
with Buckhead or its affiliate with respect to all of the Company Hotels
currently leased to Crossroads. The Company anticipates that the new lease
agreements will contain substantially the same terms as the current lease
agreements with Crossroads.
PERCENTAGE LEASES
IN GENERAL
The Company leases each of the Company Hotels pursuant to the
Company's standard form Percentage Lease (herein so called). Each Percentage
Lease contains substantially the provisions described below, and the Company
intends that future leases with respect to its hotel property investments
will contain substantially similar provisions, although the Company's Board
of Directors may, in its discretion, alter any of these provisions with
respect to any particular lease, depending on the purchase price paid,
economic conditions and other factors deemed relevant at the time, and as may
be necessary to achieve or in the future maintain the Company's status as a
REIT under the Internal Revenue Code.
PERCENTAGE LEASE TERMS
Each Percentage Lease has an initial term of not less than fifteen
years, subject to earlier termination upon the occurrence of certain
contingencies described in the Percentage Leases (including, particularly,
provisions relating to damage to hotels, condemnation of hotels, and
termination on disposition of hotels).
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AMOUNTS PAYABLE UNDER THE PERCENTAGE LEASES
During the term of each Percentage Lease, the lessee is obligated to
pay (i) base rent, (ii) percentage rent, and (iii) other than the property
taxes on the hotels (the Company is obligated to pay such property taxes),
all taxes, assessments, ground rents, water, sewer or other rents and
charges, excises, tax inspection, authorization or similar fees and all other
governmental charges (the "Impositions"), and (iv) every fine, penalty,
interest and cost for non-payment or late payment of base rent, percentage
rent, or the Impositions. Base rent accrues and is required to be paid
monthly. Percentage rent is based on percentages of room revenues for each of
the hotels. Percentage rent is due and payable quarterly.
MAINTENANCE, MODIFICATIONS AND CAPITAL EXPENDITURES
Generally, the lessee, at its expense, is required to maintain the
hotels in good order and repair, except for ordinary wear and tear, and to
make non-structural repairs, foreseen and unforeseen repairs, and ordinary
repairs which may be necessary and appropriate to keep the hotels in good
order and repair.
The lessee, at its expense and subject to approval by the Company,
may make non-capital and capital additions, modifications or improvements to
the hotels, provided that such action does not significantly alter the
character or purposes of the hotels or significantly detract from the value
or operating efficiencies of the hotels. All such alterations, replacements
and improvements become the property of the Company upon termination of the
Percentage Leases. The Company owns substantially all personal property
(other than inventory, linens and other nondepreciable personal property) not
affixed to, or deemed a part of, the real estate or improvements thereon,
except to the extent that ownership of such personal property would cause the
rents under a Percentage Lease not to qualify as "rents from real property"
for REIT income test purposes.
Under the Percentage Leases, the Company is required to fund into
replacement reserve accounts (the "Reserve Accounts") amounts ranging from
four percent (4%) to six percent (6%) of gross room revenue for the preceding
month. Deposits in the Reserve Accounts are used to fund replacements of
furniture, fixtures and equipment and for capital additions to the hotels.
Expenditures from the Reserve Accounts generally must be jointly approved by
the Company and the lessee.
INSURANCE AND PROPERTY TAXES
The Company is responsible for paying the property taxes on the
Company Hotels. Any changes in the terms of the property taxes will be made
pursuant to local tax statutes. The lessee is required to pay for all
insurance on the Company Hotels, with extended coverage, including business
interruption, casualty, comprehensive general public liability, workers'
compensation and other insurance as described in the Percentage Leases, and
must name the Company as the insured or an additional named insured.
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INDEMNIFICATION
Under each of the Percentage Leases, the lessee is obligated to
indemnify and hold harmless, the Company from and against all liabilities,
costs and expenses (including reasonable attorneys' fees and expenses)
incurred by, imposed upon or asserted against the Company; provided, however,
that such indemnification will not be construed to require the lessee to
indemnify the Company against the Company's own grossly negligent acts or
omissions or willful misconduct.
MASTER AGREEMENTS
The Company Hotels leased by Crossroads are subject to two separate
Master Agreements among the Company, Crossroads and Crossroads Hospitality,
whereby Crossroads Hospitality secures certain obligations of Crossroads. The
obligations relate to the payment of termination fees if Crossroads
voluntarily terminates more than one of the Percentage Leases in the first
five years of each of the Percentage Leases and the payment of termination
fees and/or rent in the event Crossroads defaults under any of the Percentage
Leases. To secure the obligations of Crossroads under the Percentage Leases,
Crossroads Hospitality pledged as collateral pursuant to each Master
Agreement 30,000 shares of the Company's Class A Common Stock (a total of
60,000 shares) acquired by Crossroads Hospitality in the Company's initial
public offering to collateralize the payment of rent due under the Percentage
Leases during the first three years of the lease terms. Effective March 25,
1998, the Company agreed to release the shares of Class A Common Stock
serving as collateral under the Master Agreements, in return for Crossroads
Hospitality guarantying the obligations of Crossroads under the Percentage
Leases as previously secured by such shares. In the event the Company
terminates the existing lease agreements with Crossroads as described in
"Management of Hotels" above, the Master Agreements with Crossroads will also
be terminated.
FRANCHISE AGREEMENTS
All of the Company Hotels are currently operated pursuant to
franchise agreements (the "Franchise Agreements"). The Company expects that a
majority of any additional hotel properties it may acquire will also be
subject to similar agreements. The Company believes that franchises
(including hotel licenses) generally provide advantages to hotel operators
through the use of advertising on a much broader scale than would be possible
for an individual hotel or small group of hotels, nationally recognized brand
names, nationally accessible reservations systems, technical and business
assistance to the individual franchisee and substantial buying power over
approved suppliers.
The Franchise Agreements generally require the franchisee to pay a
monthly franchise fee based on gross sales and to pay various other marketing
fees associated with certain marketing or advertising and centralized
reservation service funds, usually based on gross sales. The responsibility
for payment of the franchise fees has been assigned to the lessee under the
Percentage Leases. Such fees may vary between individual hotels within a
franchise system based on the type of marks, restaurants or other aspects of
the particular franchise system.
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The Franchise Agreements generally contain specific standards for,
and restrictions and limitations on, the operation and maintenance of the
hotels which are established by the franchisors to maintain uniformity in the
system created by each such franchisor. Such standards generally regulate the
hours of operation, maintenance, appearance and cleanliness, quality and type
of goods and services offered, signage, protection of marks and advancement
of marks. Compliance with such standards could require significant
expenditures by the lessee of the hotel for capital improvements. Any such
improvements could increase the value of the applicable hotel to the benefit
of the Company.
The Franchise Agreements generally require the consent of the
franchisor to a transfer of an interest in the applicable franchise, and both
the consent of the franchisor and the execution of a new franchise agreement
in the event of a transfer of all or a controlling portion of the franchisee
under the relevant Franchise Agreement.
GROWTH STRATEGY
The Company's growth strategy is to increase cash flow and enhance
shareholder value by acquiring additional existing hotels that meet the
Company's investment criteria and by participating, through the Percentage
Leases, in revenue growth at its hotels. As discussed in "Management of
Hotels" above, the Company has entered into a letter of intent to lease
certain of the Company Hotels to Buckhead. The Company intends to form a
formal alliance with Buckhead, a proven hotel management company, in which
Host and Buckhead would be involved together in the direct acquisition of
assets. Under the proposed alliance, Buckhead would agree to pay, as part of
the acquisition and lease process, an amount equal to 2.25 times estimated
fee revenue earned by Buckhead during the first year after the acquisition of
a hotel property. Such amounts would be paid directly to the Company or its
affiliates and thereby reduce the Company's acquisition costs. Currently, the
Company is focusing its acquisition strategy primarily upon the acquisition
of additional limited service and full service hotels in California and the
Midwest, Southwest and Southeast areas of the United States.
The Company will consider investments in hotel properties of the
types described above that meet one or more of the following criteria: (i)
properties in markets with projected growth potential; (ii) properties which
may be under-performing due to poor management, weak franchise affiliation or
a need for renovation; (iii) properties with relatively stable operating
histories; and (iv) properties with attractive purchase prices. Although the
Company presently anticipates that additional investments in hotel properties
will be made through the Company, additional investments also may be made
indirectly by other entities controlled by the Company. Such investments may
be financed, in whole or in part, from borrowings, the balance of the net
proceeds from future offerings, if any, subsequent issuances of common stock
or other securities or from cash flow. However, because the Company may, upon
election of REIT status, be required to distribute annually at least 95% of
its taxable net income to maintain REIT status under the Internal Revenue
Code, cash flow available for future investments may be limited.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws,
ordinances, regulations and common law, a current or previous owner or
operator of real property may be liable for the costs of removal or
remediation of hazardous or toxic substances on, under or in such property.
Such laws and common law principles could also be used to impose liability
upon owners or operators of real
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properties for release of asbestos containing materials ("ACMs") that cause
personal injury or other damage. The policy of the Company is to obtain a
Phase I environmental assessment report for each of the hotels acquired by
the Company, prepared by an independent environmental consultant.
The Company is not aware of any environmental condition with respect
to the Company Hotels that could have a material adverse effect on the
Company's financial condition or results of operations. No assurances can be
given, however, that (i) environmental assessments undertaken with respect to
the Company Hotels have revealed all potential environmental liabilities,
(ii) any prior owner or operator of the real property on which the Company
Hotels are located did not create any material environmental condition not
known to the Company, or (iii) a material environmental condition does not
otherwise exist as to any one or more Company Hotels. Pursuant to the
Percentage Leases, the Lessee has agreed to comply with applicable
environmental regulations. However, in the event that the Company is held
liable for costs and expenses in connection with a site clean-up or in
connection with ACMs, and the Company is unable to enforce or obtain
recoveries under the indemnity provisions of the Percentage Leases, such
costs and expenses could have a material effect on the Company's ability to
make distributions to its shareholders.
EMPLOYEES
As of December 31, 1997, the Company had 4 full time employees and 1
part time employee.
COMPETITION
The hotel industry is highly competitive. All of the Company Hotels
are located in developed areas and experience competition primarily from
other similarly priced hotels within their immediate vicinity. In addition,
each hotel competes with other hotel properties in its particular geographic
market. The number of competitive hotel properties in a particular market or
geographic area could have a material and adverse affect on the rental market
for the room units at each hotel and the rates which may be charged for such
room units. The Company Hotels must also compete for occupants with new
hotels in the area.
In addition, when the Company seeks to acquire hotel properties, the
Company will be competing for investment opportunities with entities which
have substantially greater financial resources than the Company. Competition
may generally reduce the number of suitable investment opportunities offered
to the Company and increase the bargaining power of property owners seeking
to sell. Further, the Company anticipates that competition from entities
organized for purposes substantially similar to the Company's objectives will
increase significantly over time.
SEASONALITY OF THE HOTEL BUSINESS
The hotel industry is seasonal in nature. Generally, hotel revenues
are greater in the second and third quarters than in the first and fourth
quarters of a calendar year. All of the Company Hotels typically reflect the
effects of this industry seasonality. This seasonality can be expected to
cause significant
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quarterly fluctuations in the Company's lease revenues. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations --
Seasonality."
REGULATORY MATTERS
GENERAL
Hotel properties are subject to various laws, ordinances and
regulations, including regulations relating to recreational facilities, such
as swimming pools, activity centers and other common areas. Based on its
inspection and evaluation of the Company Hotels, the Company believes that
each Company Hotel has the necessary permits and approvals required to enable
the lessee of the particular hotel to operate and manage such hotel in the
manner contemplated by the applicable lease agreement.
AMERICANS WITH DISABILITIES ACT
The Company Hotels must comply with Title III of the Americans with
Disabilities Act "ADA" to the extent that such properties are "public
accommodations" and/or "commercial facilities" as defined by the ADA. Under
the public accommodations provisions of the ADA, the Company as owner of the
Company Hotels, will be obligated to reasonably accommodate the patrons of
the hotel properties who have physical, mental or other disabilities. This
includes the obligation to remove architectural and communication barriers at
the Company Hotel when doing so is "readily achievable". In addition, under
the commercial facilities provisions of the ADA, the Company is obligated to
ensure that alterations to any hotel properties conform to the specific
requirements of the ADA implementing regulations. Noncompliance could result
in the imposition of fines, injunctive relief, and an award of damages and
attorneys' fees. The lessee generally is obligated to remedy any ADA
compliance matters pursuant to the Percentage Leases. However, if required
changes were to involve significant expenditures, the ability of the lessee
to pay rent could be adversely affected which in turn could adversely affect
the Company's ability to make distributions to its shareholders. Currently,
the Company believes that all Company Hotels are in compliance with the ADA
in all material respects.
ITEM 2. PROPERTIES
The Company's principal executive offices are located at 6116 N.
Central Expressway, Suite 1313, Dallas, Texas. The Company leases
approximately 1,200 square feet for its corporate headquarters. The lease
term extends through December, 1999, at an annual rate of approximately
$16,000.00. The Company believes that the size of the corporate headquarters
is adequate for the Company's current needs. In addition, the Company owns
twelve hotel properties located in nine states and consisting of
approximately 922 rooms. Set forth in the following chart is certain
information relating to the Company Hotels.
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<TABLE>
Gross Revenues
For the 12 Annual Year
Annual Percentage Months Ended Base Acquired/
Rooms Rent Formula (Year to Date "YTD") 12-31-97 Rent**** Built
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Miner, 63 35% YTD Revenues over initial Break-Even
Missouri Threshold of $693,000* on first $200,000 over
(Super 8) Break-Even Threshold, and 40% thereafter, less
Percentage Rent previously paid YTD. $ 741,000 $296,800 1995/85
Poplar Bluff, 63 35% YTD Revenues over initial Break-Even
Missouri Threshold of $575,000* on first $100,000 over
(Super 8) Break-Even Threshold, and 37% thereafter, less
Percentage Rent previously paid YTD. $ 670,000 $233,800 1995/85
Rock Falls, 63 28.75% YTD Revenues over initial Break-Even
Illinois Threshold of $604,000** on first $200,000 over
(Super 8) Break-Even Threshold, and 35% thereafter, less
Percentage Rent previously paid YTD. $ 687,000 $232,500 1995/85
Somerset, 63 32% YTD Revenues over initial Break-Even
Kentucky Threshold of $425,000*** on first $200,000
(Super 8) over Break-Even Threshold, and 35% thereafter,
less Percentage Rent previously paid YTD. $ 500,000 $143,800 1995/85
Mission Bay, 117 30% YTD Revenues over initial Break-Even
California Threshold of $1,100,000** on first $100,000
(Super 8) over Break-Even Threshold, and 40% thereafter,
less Percentage Rent previously paid YTD. $1,274,000 $308,000 1996/87
Flagstaff, 90 32% YTD Revenues over $925,000 Less
Arizona Percentage Rent previously paid.
(Super 8) $1,337,000 $505,000 1997/85
Tallahassee, 78 30% YTD Revenues over initial Break-Even
Florida Threshold of $727,000 on first $300,000 over
(Sleep Inn) Break-Even Threshold, and 35% thereafter,
less Percentage Rent previously paid YTD. $ 688,000 $277,300 1996/94
Destin, 77 30% YTD Revenues over initial Break-Even
Florida Threshold of $850,500 on first $350,000 over
(Sleep Inn) Break-Even Threshold, and 35% thereafter,
less Percentage Rent previously paid YTD. $ 975,000 $437,500 1996/92
Ocean Springs, 78 30% YTD Revenues over initial Break-Even
Mississippi Threshold of $788,400 on first $350,000 over
(Sleep Inn) Break-Even Threshold, and 35% thereafter,
less Percentage Rent previously paid YTD. $1,033,000 $388,900 1996/95
Sarasota, 80 30% YTD Revenues over initial Break-Even
Florida Threshold of $802,800 on first $300,000 over
(Sleep Inn) Break-Even Threshold, and 35% thereafter,
less Percentage Rent previously paid YTD. 989,000 $313,800 1996/93
Auburn, 78 30% YTD Revenues over initial Break-Even
Indiana Threshold of $760,000 on first $260,000 over
(Country Hearth) Break-Even Threshold, and 40% thereafter, less
Percentage Rent previously paid YTD $903,000 $303,000 1997/87
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Findlay, 72 30% YTD Revenues over initial Break-Even
Ohio Threshold of $740,000 for first $300,000, and $993,000 $314,000 1997/88
(Country Hearth) 40% thereafter, less Percentage Rent previously
paid YTD.
Consolidated Total for Hotels $10,790,000 $3,754,000
</TABLE>
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* Break-Even Threshold increases by 2% per year
** Break-Even Threshold increases by 3% per year
*** Break-Even Threshold remains constant
**** Base Rent Effective 12/31/97
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Company's Class A Common Stock trades and is reported on the
American Stock Exchange ("AMEX") under the symbol "HFD". The Class A Common
Stock began trading on April 22, 1996, the date of its initial public
offering. On January 31, 1997, Mr. Guy E. Hatfield, a principal stockholder
and director of the Company, converted 140,000 shares of the Class C Common
Stock of the Company into shares of Class A Common Stock. In addition, on
September 25, 1997, Mr. Hatfield converted 140,000 shares of the Class B
Common Stock of the Company into shares of Class A Common Stock. See "Certain
Relationships and Related Transactions". The shares of Class A Common Stock
issued by the Company pursuant to such conversions are "restricted
securities" under the Securities Act of 1933. After giving effect to the
above conversions, no shares of Class B Common Stock or Class C Common Stock
remain issued and outstanding.
The Company also has issued and outstanding two series of warrants
designated "Series A Warrants" and "Series B Warrants". The Series A Warrants
provide warrants to purchase 225,000 shares of Host Funding's Class A Common
Stock at $9.90 per share, and expire on February 2, 2000. The Series B
Warrants provide warrants to purchase 225,000 shares of the Company's Class A
Common Stock at $10.80 per share, and expire on February 2, 2001. There are
additional provisions in the Series A Warrants and the Series B Warrants that
allow certain limited registration rights and pari passu treatment upon the
occurrence of certain events, including, without limitation, stock splits,
mergers, reclassifications of stock, or a recapitalization of the Company. In
addition, the Series B Warrants include certain restrictions prohibiting
exercise of the warrants if the Company gives notice of a possible public
offering of the securities of the Company in which the net proceeds
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to the Company are not less than $50 million. The prohibition against
exercise terminates on the earlier to occur of (i) sixty days after the
effective date of the public offering or (ii) February 2, 1999. On August 29,
1997, the Company gave notice to the holders of the Series B Warrants of a
possible public offering thereby imposing the foregoing restrictions on
exercise of the Series B Warrants.
The following table shows the range of high and low bid prices of
the Company's Class A Common Stock for the years 1996 and 1997, as reported
through AMEX. These quotations represent prices between dealers without
retail markup, markdown or commissions, and may not necessarily represent
actual transactions.
<TABLE>
1996
----
High Low
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April 22, 1996 to June 30, 1996 9 7 7/8
Third Quarter 8 5/8 7 5/8
Fourth Quarter 8 3/4 7 3/8
1997
----
High Low
---- ---
First Quarter 10 1/2 7 1/2
Second Quarter 9 7/8 8 3/8
Third Quarter 9 5/8 8 7/8
Fourth Quarter 9 3/16 5
</TABLE>
As of March 24, 1998, there were approximately 1,264 shareholders
of record of the Company's Common Stock and the closing bid price was $6.125.
During 1996, the Company declared dividends of $0.2275 per share on
August 1 and $0.2375 per share on November 1. During 1997, the Company
declared dividends of $0.24 per share on February 4, $0.24 per share on May
30, $0.24 per share on September 2, and $0.24 per share on December 12.
The Company's ability to make dividend payments to its shareholders
is significantly dependent upon the Company's net cash flow from the
operations of the Company Hotels. The Company intends to continue its policy
of making quarterly dividend distributions to the Company's shareholders
based upon the Company's operating results. No assurances can be given that
net cash flow from the Company's operations will be sufficient to enable the
Company to make future dividend payments comparable to prior quarterly
dividend distributions.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial information
for the Company, all of which has been derived from the financial statements
which are included elsewhere in this Annual Report on Form 10-K. The
following information should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto for the Company and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
located elsewhere in this Annual Report on Form 10-K.
<TABLE>
Year Ended Year Ended
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
OPERATING RESULTS:
GROSS REVENUES $ 3,837,350 $ 1,768,783
LOSS BEFORE INCOME TAXES $(1,025,514) $ (149,276)
NET LOSS $(1,025,514) $ (149,276)
BASIC AND DILUTED
NET LOSS PER COMMON SHARE $(0.68) $(0.12)
WEIGHTED AVERAGE NUMBER
OF BASIC AND DILUTED
COMMON AND COMMON
EQUIVALENT SHARES
OUTSTANDING 1,516,652 1,244,668
DISTRIBUTIONS PER COMMON SHARE:
CLASS A $0.96 $0.465
CLASS B $(0.00) $(0.00)
CLASS C $(0.00) $(0.00)
TOTAL ASSETS $31,996,181 $20,435,575
LONG-TERM OBLIGATIONS
(including current portion) $25,036,346 $15,500,000
SHAREHOLDERS' EQUITY
(DEFICIT) $ 4,279,337 $ 4,703,395
OTHER FINANCIAL DATA:
NET CASH PROVIDED BY
(USED IN) OPERATING,
INVESTING AND FINANCIAL
ACTIVITIES $ (169,825) $ 218,193
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
On February 3, 1997, the Company entered into an Agreement with HMR
Capital, LLC, a Delaware limited liability company ("HMR"), and Host Funding
Advisors, Inc., a Delaware corporation (the "Advisor"), whereby (i) HMR and
the Company agreed to restate and amend the
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Acquisition Agreement between the parties (the "Acquisition Agreement") and
(ii) the Advisor and the Company agreed to terminate, effective January 31,
1997, the Advisory Agreement between the parties (the "Advisory Agreement"). The
Acquisition Agreement was also terminated by the Company effective September
4, 1997. In consideration for the termination of the Advisory Agreement and
the restatement and amendment of the Acquisition Agreement, the Company paid
the Advisor $30,000 in cash and issued 225,000 Series A Warrants (the "Series
A Warrants") and 225,000 Series B Warrants (the "Series B Warrants") to HMR.
See "Market for the Company's Common Equity and Related Shareholder Matters".
The Company entered into Employment Agreements (the "Employment
Agreements") with William Birdsall, Chairman of the Board; Michael S.
McNulty, President; and Bona K. Allen, Chief Financial Officer, for a term of
three years from February 1997. The Employment Agreements provide for
aggregate base salaries of $291,000 with a minimum bonus of 15% up to a
maximum of 50%, based upon a prescribed formula in the Employment Agreements,
of base compensation in the first year. No bonuses were paid or accrued under
the Employment Agreements for the year ended December 31, 1997. Effective as
of January 1, 1998, Mr. Birdsall agreed to a voluntary reduction in salary
under his employment agreement to $4,500 per month through June 30, 1998. The
Employment Agreements also provide for base salary increases based upon
prescribed increases in the Company's asset size, however, the Company does
not anticipate any 1998 salary increases pursuant to the Employment
Agreements. The Employment Agreements are terminable by the Company, for
cause, upon thirty (30) days written notice, or upon death or disability,
with severance payments due the employees ranging from nothing to two years
of current base salary then in effect.
The Annual Meeting of the Stockholders of the Company was held on
May 21, 1997 in Dallas, Texas. At the Annual Meeting, the Stockholders
approved the Host Funding, Inc. 1997 Incentive Plan (the "1997 Plan")
pursuant to which certain individuals may be granted awards for incentive
stock options, non-statutory stock options, stock awards, performance shares,
and incentive awards. No such awards were granted for the year ended December
31, 1997.
On March 14, 1997, the Company acquired a 90 room Super 8 Hotel
located in Flagstaff, Arizona (the "Flagstaff Super 8") for a gross purchase
price of $5,125,000, excluding closing expenses. The Flagstaff Super 8 was
acquired by increasing the Company's initial credit facility from Credit
Suisse First Boston Mortgage Capital, LLC ("First Boston") from $15,500,000
to $21,725,000 (the "Revised Credit Facility"). The Revised Credit Facility
is comprised of two separate credit facilities of $8,725,000 of which Host
Ventures is the principal obligor (the "Host Ventures Credit Facility") and
$13,000,000 of which CrossHost is the principal obligor (the "CrossHost
Credit Facility"). See "Liquidity and Capital Resources".
On October 21, 1997, the Company completed the purchase of two
Country Hearth Inn properties (the "Country Hearth Inns") located in Auburn,
Indiana and Findlay, Ohio, consisting of 150 rooms for an aggregate purchase
price of $5,846,000. The Company purchased the Country Hearth Inns by forming
two special purpose, limited partnerships with Buckhead America Corporation,
a publicly-traded hotel company ("Buckhead"), of which the Company is the
beneficial owner of a 1% general partnership interest and approximately 80%
of the outstanding limited partnership interests in each limited partnership.
The limited partnerships paid the following consideration for the Country
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<PAGE>
Hearth Inns: $580,000 in cash, the issuance of 80,819 shares of the Class A
Common Stock of the Company having a fair market value on the date of
issuance of approximately $750,000, the execution and delivery to the sellers
by the limited partnerships of promissory notes in the aggregate amount of
$1,138,555 (the "Country Hearth Notes") and the assumption of existing
indebtedness by the limited partnerships in the aggregate amount of
$3,457,845, which indebtedness is currently held of record by La Salle
National Bank, as Trustee for the registered holders of Asset Securitization
Corporation, Series 1996-D-3 (the "La Salle Notes"). See "Liquidity and
Capital Resources".
The Flagstaff Super 8 was acquired pursuant to the terms of the
Acquisition Agreement between the Company and HMR. Pursuant to the terms of
the Acquisition Agreement, the Company and HMR agreed that the acquisition
fee earned by HMR relating to the Flagstaff Super 8 was 16,000 shares of the
Class A Common Stock of the Company valued at $10 per share which was paid on
May 19, 1997. The Company recorded the acquisition fee on the Flagstaff Super
8 at $9.50 per share which was the last traded price of the Class A Common
Stock of the Company on the American Stock Exchange ("AMEX") on March 14,
1997. The acquisition fee (based upon a value of $10 and $9.50 per share or
$160,000 and $152,000, respectively) represented approximately 3.1% and 3.0%,
respectively, of the gross purchase price totaling $5,125,000, excluding
closing expenses. In addition, Hotel Mortgage Resources Corporation ("HMRC")
received a loan origination fee of $84,907 relating to the financing provided
by First Boston for the acquisition of the Flagstaff Super 8.
The Country Hearth Inns were also acquired pursuant to the terms of
the Acquisition Agreement. Pursuant to the terms of the Acquisition
Agreement, the Company and HMR agreed that the acquisition fee earned by HMR
relating to the Country Hearth Inns was 17,539 shares of the Class A Common
Stock of the Company valued at $10 per share and paid on January 7, 1998. The
Company recorded the acquisition fee on the Country Hearth Inns at $6.5625
per share which was the last traded price of the Class A Common Stock of the
Company on the AMEX on January 5, 1998. The acquisition fee (based upon a
value of $10 and $6.5625 per share or $175,390 and $115,000 respectively),
represented approximately 3.0% and 2.0%, respectively, of the gross purchase
price totaling $5,846,000, excluding closing expenses.
Each of HMR and HMRC is a previous affiliate of Mr. Michael S.
McNulty, the president and a director of the Company. See "Certain
Relationships and Related Transactions".
In May, 1997 the Company was informed that the Sleep Inn property
located in Tallahassee, Florida (the "Tallahassee Sleep Inn") had certain
structural defects. The Company suspended operations at the Tallahassee Sleep
Inn and began negotiations with the previous owner to correct the defects. In
December, 1997 the Company executed a settlement with the insurance carrier
whereby the Company was paid approximately $210,000 in business interruption
insurance. The Company and the previous owner of the Tallahassee Sleep Inn
executed a lease in February, 1998 with a commencement date of May 1, 1998,
pursuant to which the previous owner of the Tallahassee Sleep Inn became the
lessee of the property and agreed to undertake, at its sole cost and expense,
the necessary repairs to make the property operational. The Company
anticipates the Tallahassee Sleep Inn property will be open for business in
the second quarter, 1998.
15
<PAGE>
As previously reported, the Company negotiated and entered into a
letter of intent during the second quarter of 1997 relating to the purchase
of four hotels (including franchises representing Holiday Inn, Courtyard by
Marriott, and Hilton) valued at approximately $50,000,000 and comprising over
800 rooms. Effective February 17, 1998, negotiations relating to the letter
of intent were terminated due to the inability of the parties to reach an
agreement economically feasible and acceptable to both parties.
The Company, as a requirement under the Internal Revenue Code (the
"Code") to elect REIT status, must have no more than five (5) shareholders,
who own no more than 50% of common stock, common stock equivalents, or other
forms of equity outstanding. The Company did not meet this requirement as of
December 31, 1997 and currently is subject to the corporate tax provisions of
the Code. The Company, however, is in a net operating loss position, and has
a net deferred tax asset under SFAS 109, Accounting for Income Taxes, that
has not been fully reserved. Therefore, the Company's decision not to elect
REIT qualification will not adversely affect the stockholders of the Company
in that the Company will have no taxable income for the 1997 tax year. Under
the Code, the Company is allowed an exemption until six months after the end
of the tax year for which the election is to be effective to meet the
requirement. Management of the Company intends to continue its efforts to
meet the Code requirements for REIT qualification in the future. No
assurance, however, can be given that REIT status will be achieved during
1998, which could result in the Company continuing to be taxed as a C
corporation.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1997 AND NINE MONTHS ENDED DECEMBER 31,
1995:
The Company did not acquire any assets until April 1, 1995. On that
date the four Super 8 hotels located in Miner, Missouri; Poplar Bluff,
Missouri; Rock Falls, Illinois; and Somerset, Kentucky were acquired by the
Company. Further, on April 22, 1996, the Company completed an initial public
stock offering of 500,000 common shares that raised net cash proceeds
totaling $4,500,000 (the "Stock Offering"), and simultaneously acquired a
Super 8 Motel located in San Diego, California. The foregoing five hotel
properties are referred to herein as the "Initial Hotels." Since the
acquisition of the Initial Hotels and the Stock Offering, the Company has
acquired seven additional hotel properties during the years 1996 and 1997.
See "Business-Business Development."
Occupancy, average room rates, and revenue per available room of
66%, $47.62, and $33.60 for the Company Hotels for the year ended December
31, 1997 resulted in total sales, including room sales of approximately
$10,792,000.
Lease Revenue, Related Party: Reduced to $0 in 1997 from $278,453 in
1996 and $806,670
16
<PAGE>
in 1995. The reductions were the result of the termination of the related
party leases and Crossroads Hospitality Tenant Company, L.L.C. (an unrelated
party) ("Crossroads"), becoming lessee of the Company Hotels in April, 1996.
The reduction from 1995 to 1996 was the result of the related party leasing
the hotels for approximately three months in 1996, as opposed to nine months
in 1995.
Lease Revenue: The 1997 amount of $3,679,355 reflects additional
hotel acquisitions and a full year of unrelated parties as lessees; the 1996
amount of $1,262,165 reflects a partial year (April through year end) of
unrelated party as lessee.
Interest Income, Related Parties: The 1997 amount of $121,976
reflects interest on the independent directors notes and the Related Party
Note. The 1997 interest income related to the Related Party Note is lower
than 1996 due to the satisfaction of the Related Party Note effective
September, 1997. See "Certain Relationships and Related Transactions."
Interest Expense, Depreciation & Amortization Expense, and Property
Taxes: These items were significantly higher in 1997 than 1996 and 1995 due
to the increase in the Company's hotel property portfolio through
acquisitions in 1997 and 1996.
Depreciation expense, which is included in depreciation and
amortization, is calculated based upon the original historical cost of the
Initial Hotels and the acquisition value of the remaining Company Hotels.
Administrative Expenses, Other: Pursuant to the termination of the
Advisory Agreement, the Company became self administered in January, 1997,
causing an increase in administrative expenses. See "Recent Developments"
above. Accordingly, the Company employed Messrs. Allen, McNulty and Birdsall
pursuant to the Employment Agreements described above. The Company also
incurred costs related to clerical and accounting related functions. In
April, 1997 the Company relocated its offices from La Jolla, California to
Dallas, Texas. The Company also incurred significant non-recurring costs that
management believes will not recur at 1997 levels in future periods.
The following are items included in the $1,293,918 amount reflected
as Administrative Expenses-Other that had not been incurred in previous
periods. Salaries, employer taxes, health insurance: approximately $328,000;
rent, office supplies, telephone, postage, reproduction, meetings:
approximately $55,000; legal and due diligence costs associated with
evaluating potential acquisitions: approximately $270,000. Management
believes approximately $196,000 of these other expense amounts are
non-recurring amounts.
The Company's Board of Directors has directed the Company to explore
alliances with public or private hotel management companies to reduce certain
overhead costs. The Company anticipates forming an alliance and becoming
externally advised, thus allowing the Company to terminate certain Employment
Agreements and enter into a reimbursement agreement, in which the advisor
would bear substantial overhead and acquisition costs. This arrangement will
substantially reduce costs to the Company.
17
<PAGE>
Minority interest in Partnerships: Resulting from the Company's
beneficial ownership of approximately 80% of the limited partnership
interests and a 1% general partnership interest in the limited partnerships
which own the Country Hearth Inn Hotels.
Amortization of unearned directors' compensation has been calculated
based upon the terms of the independent directors notes.
Net loss per share and weighted average shares outstanding have
been calculated based upon the daily average of the number of shares
outstanding upon completion of the Stock Offering, total shares issued to the
independent directors, and total shares issued in subsequent acquisitions by
the Company, added to the AAG shares outstanding upon completion of the Stock
Offering, which shares of AAG are considered to have been outstanding from
the date of formation of Host Funding. The Company has no dilutive common
stock equivalents outstanding.
LIQUIDITY AND CAPITAL RESOURCES
CrossHost entered into a loan facility with First Boston in the
amount of $15,500,000 on September 13, 1996 (the "Initial Loan Facility") and
immediately borrowed the entire funds available under the Initial Loan
Facility. The Initial Loan Facility was payable interest only, monthly, at
the LIBOR Rate plus 304.5 basis points (LIBOR Rate was 5.53906% as of
December 31, 1996), with a maturity date of October 1, 1997 at which time all
unpaid interest plus principal was due.
On March 14, 1997, CrossHost entered into the CrossHost Loan
Facility totaling $13,000,000 and Host Ventures entered into the Host
Ventures Loan Facility totaling $8,725,000 whereby the Initial Credit
Facility was repaid totaling $15,500,000 and the Flagstaff Super 8 was
acquired for approximately $5,125,000. In addition, closing costs and other
expenses of the CrossHost and Host Ventures Loan Facilities and of the
Flagstaff Super 8 were incurred totaling approximately $757,000. The
remaining loan proceeds of approximately $343,000 were provided to the
Company for working capital.
The CrossHost Loan Facility is payable over twenty years in equal
monthly installments of $120,838, including interest at a fixed rate of 9.46%
per annum (the "Base Interest Rate") over the first ten years, with an
increased fixed monthly payment the second ten years that fully amortizes
remaining principal plus interest at an interest rate equal to the greater of
2% over the Base Interest Rate or 2% over the then-existing ten year U.S.
Treasury Note rate, with a due date in March 2017. The Host Ventures Loan
Facility is payable interest only, monthly, at the LIBOR Rate plus 350 basis
points (LIBOR Rate was 5.4375% as of March 1, 1998), with a maturity date of
April 1, 1999, at which time all unpaid interest plus principal are due.
The Host Ventures Loan Facility is secured by the Company Properties
located in Flagstaff, Arizona, Sarasota, Florida and Ocean Springs,
Mississippi and the CrossHost Loan Facility is secured by the remaining
Company Properties, excluding the two Country Hearth Inns. The two loans are
not cross-defaulted or cross-collaterialized. Host Funding signed an
Indemnity and Guaranty Agreement (the "Indemnity Agreement") relating to both
the Host Ventures Loan Facility and the CrossHost Loan Facility. The
Indemnity Agreement requires Host Funding (i) to indemnify First Boston in
the event
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<PAGE>
either CrossHost or Host Ventures is in breach of the non-personal liability
"carve-outs" typically found in securitized financing documentation; and (ii)
to guaranty to First Boston full payment and performance of the obligations
of CrossHost and Host Ventures in the event either entity enters into
bankruptcy proceedings.
The La Salle Notes assumed by the Company in connection with the
acquisition of the Country Hearth Inns are each dated July 31, 1996 and
payable over twenty years in equal monthly installments of $17,405 (Findlay,
Ohio) and $18,402 (Auburn, Indiana). Each monthly installment includes
interest at an initial fixed rate of 10.78% per annum during the first ten
years, with an increased interest rate during the second ten years equal to
the greater of the initial interest rate plus two percent (2%) or the then
existing treasury bill rate plus two percent (2%). The outstanding principal
balance and all accrued, but unpaid interest on the La Salle Notes is due and
payable on August 11, 2016. Each of the La Salle Notes is secured by the
applicable Country Hearth Inn. The La Salle Notes are not
cross-collateralized or cross-defaulted.
Each of the Country Hearth Notes executed in connection with the
acquisition of the Country Hearth Inns bears interest at the rate of the Wall
Street Journal Prime Rate plus one percent (1%). No payments are required
under the Country Hearth Notes until April 1, 1998, on which date all
outstanding principal and accrued interest is due and payable. The Company,
on behalf of the limited partnerships, is currently in negotiation with the
holders of the Country Hearth Notes to extend the maturity of such notes. The
Company pledged an aggregate of 90,000 shares (51,660 shares for Findlay,
Ohio and 38,348 shares for Auburn, Indiana) of the Class B Common Stock of
the Company to secure payment of the Country Hearth Notes. The Country Hearth
Notes are not cross-collaterized or cross-defaulted. The Company executed a
corporate guaranty pursuant to which the Company guarantees the performance
of the obligations of each of the limited partnerships under the Country
Hearth Notes.
On June 19, 1997, the Company executed a promissory note payable to
Blacor, Inc. ("Blacor") in the original principal amount of $70,000 (the
"Original Blacor Note"). On December 30, 1997, the Original Blacor Note was
canceled and replaced by a new promissory note in the original principal
amount of $86,595. Proceeds from the note were used for general operating
purposes. See "Certain Relationships and Related Transactions: Other Related
Party Notes."
On December 30, 1997, the Company also executed a promissory note
payable to Guy and Dorothy Hatfield in the original principal amount of
$100,000 (the "Hatfield Note"). Proceeds from the note were used for general
operating purposes. See "Certain Relationships and Related Transactions: Other
Related Party Notes."
The terms of the leases on the Company Hotels (the "Company Hotel
Leases") are for a period of fifteen (15) years from the date of acquisition
of each property (the "Commencement Date"). The Company Hotel Leases have
combined total annual base rentals of $3,756,400, plus percentage rentals
ranging from 30% to 35% of year to date revenues less varying breakeven
thresholds adjusted annually by defined percentages for each hotel. During
the first four years after the Commencement Date, the lessee is entitled to
accumulate a credit of 50% of base rent paid in excess of hotel cash flow, if
any, as defined in the Company Hotel Leases, which may be applied towards
future percentage rentals that may become due (the "Negative Base Rent").
Should no future percentage rental be due under the Company Hotel Leases
during the lease terms, the Negative Base Rent will expire. No Negative Base
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<PAGE>
Rent credit was outstanding as of December 31, 1997. The Company Hotel Leases
generally require the lessee to pay all operating expenses of the properties,
including maintenance and insurance, while the Company is responsible for
property taxes. In addition, the Company is required to set aside in a
replacement reserve account, amounts from 4% to 6% of gross room revenues to
be used for capital expenditures which generally must be jointly approved by
the Company and lessee. Through December 31, 1997, the total amount due under
this provision equals approximately $440,743, $255,920 of which has been
funded at December 31, 1997. Further, should the Company decide to sell any
of the properties leased to Crossroads under the Company Hotel Leases,
Crossroads will be provided a 30 day right of first refusal to purchase such
property at the price offered the Company by the third party. In addition,
should Crossroads choose not to exercise their right of first refusal to
acquire the properties and should the Company elect to terminate the lease,
upon the Company's, Crossroads' and the buyer's consent, Crossroads may be
entitled to some portion of the sale proceeds based on a formula as provided
in the Company Hotel Leases. In addition, the Company was required to provide
a long-term advance in varying amounts not exceeding $30,000 per hotel
property to Crossroads, subject to proration adjustments, to be used for
working capital purposes which is due back to the Company at the end of the
term of the applicable Company Hotel Lease.
The Company has addressed the "Year 2000 Problem" in which certain
electronic systems may be affected by the turn of the millenium. Management
has determined that the Company's accounting software is Year 2000 compliant.
Management is evaluating the level of compliance of other systems utilized by
the Company, but does not anticipate a material effect on its financial
condition or results of operations.
The Company has no committed additional sources of external
liquidity available, therefore the Company will rely on its internal cash
flow to meet its liquidity needs. The Company's principal source of cash to
meet its cash requirements, including distributions to shareholders, is its
share of the Company's cash flow from the Company Hotel Leases. Although, the
obligations of Crossroads, as lessee, under the Company Hotels leased by
Crossroads are guaranteed in part by Crossroads Hospitality Company, LLC, a
Delaware limited liability company (a subsidiary of Interstate Hotels, Inc.,
a Delaware Corporation and parent company of Crossroads), the ability of
Crossroads to make lease payments under the Company Hotel Leases, and
therefore the Company's liquidity, including its ability to make
distributions to shareholders, is dependent on the ability of Crossroads to
generate sufficient cash flow from such Company Hotels. The following table
sets forth certain financial information for Crossroads Hospitality Company,
LLC, as of and for the year ended December 31, 1997.
<TABLE>
<S> <C>
Total Assets $1,064,004
Total Liabilities $1,013,469
Partners' Equity $ 50,535
Revenues $8,486,517
Net Income $ 85,562
</TABLE>
Other than debt service on the Company's loan facilities and notes,
the capital expenditures required under the Company Hotel Leases or the
Company's loan facilities, property taxes on the Company Hotels, obligations
under employment agreements, other administrative expenses and the Internal
Revenue Service tax requirements (the "Code") to make distributions to
shareholders to achieve or maintain the Company's REIT status, the Company is
not aware of any demands, commitments, events or uncertainties that will
result or are likely to result in a change in the Company's liquidity.
The Company intends to make additional investments in hotel
properties and may incur
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<PAGE>
indebtedness to make such investments or to meet distribution requirements
imposed on a REIT under the Code to the extent that working capital and cash
flow from the Company's investments are insufficient to make such
distributions. The Company will invest in additional hotel properties only as
suitable opportunities arise, and the Company will not undertake investments
unless adequate sources of financing are available. Based upon REIT
distribution requirements, the Company expects that future investments in
hotel properties will be financed, in whole or in part, with common stock,
proceeds from additional issuances of common stock, or from the issuance of
other debt or equity securities. The Company in the future may seek to obtain
a line of credit or a permanent credit facility, negotiate additional credit
facilities, or issue corporate debt instruments, all in compliance with its
charter restrictions. Any debt incurred or issued by the Company may be
secured or unsecured, long-term or short-term, charge a fixed or variable
interest rate and may be subject to such other terms as the Board of
Directors of the Company deems reasonably prudent.
INFLATION
Operators of hotels, in general, possess the ability to adjust room
rates quickly. Competitive pressures may, however, limit the ability of the
lessees and operators of the Company Hotels to raise room rates in the face
of inflation.
SEASONALITY
Hotel operations are generally seasonal in nature based upon
geographic locations. This seasonality can be expected to cause fluctuations
in the Company's quarterly lease revenue to the extent that it receives
percentage rent.
"THE SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION ACT OF
1995.
This Annual Report on Form 10-K contains or incorporates statements
that constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Those statements appear in a number
of places in this Annual Report on Form 10-K and include statements
regarding, among other matters, the Company's growth opportunities, the
Company's acquisition strategy, regulatory matters pertaining to compliance
with governmental regulations and other factors affecting the Company's
financial condition or results of operations. Stockholders are cautioned that
any such forward looking statements are not guarantees of future performance
and involve risks, uncertainties and other factors which may cause actual
results, performance or achievements to differ materially from the future
results, performance or achievements, expressed or implied in such forward
looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a).
21
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this Item 10 is included under the
caption "Election of Directors" of the Company's Proxy Statement for its
Annual Meeting of Stockholders to be held on June 25, 1998, which information
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is included under the
captions "Executive Compensation", "Compensation of Directors", and "Certain
Transactions", of the Company's Proxy Statement for its Annual Meeting of
Stockholders to be held on June 25, 1998, which information is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item 12 is included under the
captions "Security Ownership of Certain Beneficial Owners" and "Security
Ownership of Management," of the Company's Proxy Statement for its Annual
Meeting of Stockholders to be held on June 25, 1998, which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TERMINATION OF CERTAIN AGREEMENTS
Effective January 31, 1997, the Company terminated the Advisory
Agreement dated effective as of April 22, 1996, by and between the Company
and Host Funding Advisors, Inc. (the "Advisor"), as amended by the First
Amendment to Advisory Agreement between the parties dated effective as of
June 12, 1996 (as amended, the "Advisory Agreement"). The purpose and effect
of the termination of the Advisory Agreement was to eliminate the status of
the Company as an externally advised real estate investment trust and thereby
become self-administered and advised as of the date of termination. Also,
effective as of January 31, 1997, the Company amended the Post-Formation
Acquisition Agreement dated effective as of April 22, 1996 by and between the
Company and HMR Capital, LLC (predecessor in name to Host Acquisition Group,
LLC) ("HMR"), as amended by the First Amendment to Post-Formation Acquisition
Agreement between the parties dated effective as
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of June 12, 1996 (as amended, the "Acquisition Agreement"). The Acquisition
Agreement provided for the payment by the Company of acquisition fees on
hotel properties submitted by HMR and acquired by the Company. The
Acquisition Agreement was terminated by the Company effective September 4,
1997; provided, that the Company remains obligated to pay commissions to HMR
pursuant to the Acquisition Agreement for certain properties submitted to the
Company prior to termination of the Acquisition Agreement, if and only if,
the Company closes the purchase of such properties within one year from the
date of such termination.
In consideration for the termination of the Advisory Agreement and
the restatement and amendment of the Acquisition Agreement, the Company paid
the Advisor $30,000 in cash, and issued Series A Warrants and Series B
Warrants to HMR to purchase a total of 450,000 shares of the Class A Common
Stock of the Company (divided 225,000 shares to the Series A Warrants and
225,000 shares to the Series B Warrants). The Series A Warrants have an
expiration date of February 2, 2000 with a strike price of $9.90 per share.
The Series B Warrants have an expiration date of February 2, 2001 with a
strike price of $10.80 per share. See "Market for the Company's Common Equity
and Related Shareholder Matters."
ACQUISITION FEES ON COMPANY PROPERTY ACQUISITIONS
On March 14, 1997, the Company acquired the Super 8 Hotel located in
Flagstaff, Arizona (the "Flagstaff Super 8") pursuant to the terms of the
Acquisition Agreement by and between the Company and HMR. Pursuant to the
terms of the Acquisition Agreement, the Company and HMR agreed that the
acquisition fee earned by the Company relating to the Flagstaff Super 8 was
16,000 shares of the Class A Common Stock of the Company valued at $10 per
share which was paid on May 19, 1997. HMR is a previous affiliate of Mr.
Michael S. McNulty, the president and a director of the Company, based upon
Mr. McNulty's ownership and control of 10.38% of the membership units in HMR.
Effective February 1, 1997, HMR agreed to redeem all of Mr. McNulty's direct
and indirect interest in HMR. In addition, Hotel Mortgage Resources
Corporation ("HMRC") received a loan origination fee of $84,907 relating to
the financing provided by First Boston for acquisition of the Flagstaff Super
8. Mr. McNulty was an employee of HMRC during the calendar year 1996 and
received a gross annual salary of $60,000. Mr. McNulty terminated his
employment relationship with HMRC effective January 1, 1997.
The Country Hearth Inns were also acquired pursuant to the terms of
the Acquisition Agreement between the Company and HMR. The Company and HMR
agreed that the acquisition fee earned by HMR relating to the Country Hearth
Inns was 17,539 shares of the Class A Common Stock of the Company valued at
$10 per share which was paid on January 7, 1998. Of the 17,539 shares issued
to HMR, each of Blacor, Inc. ("Blacor") and Donegal Partners, Ltd.
("Donegal") received 3,692 shares in partial redemption of the membership
units held by each entity in HMR pursuant to the terms of that certain
Redemption Agreement among the parties dated effective as of April 8, 1997.
Each of Blacor and Donegal are affiliates of Michael S. McNulty, the
president and a director of the Company, based upon Mr. McNulty serving as
President of Blacor and General Partner of Donegal.
23
<PAGE>
The shares of Class A Common Stock of the Company, in payment of the
acquisition fees on the purchase of the Flagstaff Super 8 and the Country
Hearth Inns, are restricted securities under the Securities Act of 1933, and
subject to the resale provisions of Rule 144 promulgated under the Act.
The remaining information required by this Item 13 is included under
the caption "Certain Transactions" of the Company's Proxy Statement for its
Annual Meeting of Stockholders to be held on June 25, 1998, which information
is incorporated herein by reference.
PAYMENT OF RELATED PARTY NOTE AND REDEMPTION OF CLASS B COMMON STOCK
The Company entered into an Exchange and Note Prepayment Agreement
(the "Note Prepayment Agreement") effective as of September 17, 1997 whereby
Guy and Dorothy Hatfield (the "Hatfields") and All American Group, Ltd.
satisfied that certain Promissory Note (the "Related Party Note") dated April
1, 1995, payable to Host Funding in the principal amount of $1,805,675, with
a due date on or before March 31, 2000. Mr. Hatfield is a principal
stockholder and a director of the Company. The amount was partially satisfied
by payment of $874,325 in cash, and a $31,350 credit from the Company.
Additionally, the Company issued to the Hatfields 140,000 shares of the
Company's Class A Common Stock in exchange for the 140,000 shares of Class B
Common Stock held by the Hatfields. Simultaneously with the cash payment of
$874,325, and the exchange of the shares of Class B Common Stock described
above, the Hatfields delivered to the Company 90,000 shares of the 140,000
shares of Class A Common Stock received by the Hatfields in the exchange. The
Company accepted the 90,000 shares of Class A Common Stock in full and final
payment of the remaining $900,000 principal balance of the Related Party Note.
OTHER RELATED PARTY NOTES
On June 19, 1997, the Company executed a promissory note payable to
Blacor, Inc. ("Blacor") in the original principal amount of $70,000 (the
"Original Blacor Note"). On December 30, 1997, the Original Blacor Note was
cancelled and replaced by a new promissory note in the original principal
amount of $86,595 (the "New Blacor Note"). The New Blacor Note bears interest
at the rate of 12% per annum, with all principal and accrued interest due and
payable on demand, but if no demand is made, on May 31, 1998. Proceeds from
the New Blacor Note were used by the Company for general operating purposes.
Blacor is an affiliate of Mr. Michael S. McNulty, the president and a
director of the Company, based upon Mr. McNulty serving as president of
Blacor.
On December 30, 1997, the Company also executed a promissory note
payable to Guy and Dorothy Hatfield in the original principal amount of
$100,000 (the "Hatfield Note"). The Hatfield Note bears interest at the rate
of 12% per annum, with all principal and accrued interest due and payable on
May 31, 1998. Proceeds from the Hatfield Note were used by the Company for
general operating purposes. Mr. Hatfield is a director and principal
stockholder of the Company.
24
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this Form 10-K Annual Report:
(1) Financial Statements:
The Report of Independent Accountants and the following
consolidated Financial Statements of the Company are included
herein:
Consolidated Balance Sheet--December 31, 1997 and 1996.
Consolidated Statement of Operations--Years ended December 31,
1997 and 1996 and nine months ended December 31, 1995.
Consolidated Statement of Shareholders' Equity
(Deficit)--Years ended December 31, 1997 and 1996 and nine
months ended December 31, 1995.
Consolidated Statement of Cash Flows--Years ended December 31,
1997 and 1996 and nine months ended December 31, 1995.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules:
Schedule III - Real Estate and Accumulated Depreciation
All other schedules to the Consolidated Financial Statements
are omitted because the required information is inapplicable
or has been presented in the Financial Statements or Related
Notes thereto.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K, dated October 21,
1997, as amended by a Current Report on Form 8-K/A dated January 5, 1998,
which disclosed the consummation of the acquisition of two Country Hearth
Inns by the Company located in Findlay, Ohio and Auburn, Indiana. The Form
8-K/A included the following financial statements of the Country Hearth Inns
and certain pro forma unaudited financial statements of the Company:
25
<PAGE>
I. HOST FUNDING, INC. FINANCIAL STATEMENTS
A. Host Funding, Inc.'s Pro Forma Financial Statements
Introduction to Estimated Pro Forma Financial
Statements
Unaudited Estimated Pro Forma Balance Sheet as
of September 30, 1997
Unaudited Estimated Pro Forma Statement of
Loss for the year ended December 31, 1996,
the twelve months ended September 30, 1997
and the nine months ended September 30, 1997
and September 30, 1996
Notes to Unaudited Estimated Pro Forma Financial
Statements
B. Host Funding, Inc.'s Financial Statements
for the year ended December 31, 1996
(included in Host Funding, Inc.'s previously
filed Form 10-K for the year ended December
31, 1996, and incorporated by reference)
Independent Auditor's Report
Balance Sheet as of December 31, 1996 and 1995
Statement of Loss for the twelve months
ended December 31, 1996 and nine months
ended December 31, 1995
Statement of Shareholder's Equity for the
twelve months ended December 31, 1996 and
nine months ended December 31, 1995
Statement of Cash Flows for the twelve
months ended December 31, 1996 and nine
months ended December 31, 1995
Notes to Financial Statements
Independent Auditor's Report
Schedule III - Real Estate and Accumulated
Depreciation
C. Host Funding, Inc.'s Financial Statements
for the nine months ended September 30, 1997
and 1996 (unaudited) (included in Host
Funding, Inc.'s previously filed Form 10-Q
for the quarter ended September 30, 1997,
and incorporated by reference)
26
<PAGE>
Balance Sheets as of September 30, 1997 and
December 31, 1996
Statement of Operations for the nine months
ended September 30, 1997 and 1996 (unaudited)
Statement of Shareholders' Equity (Deficit) for
the nine months ended September 30, 1997
(unaudited)
Statement of Cash Flows for the nine months
ended September 30, 1997 and 1996 (unaudited)
II. COUNTRY HEARTH INN - FINDLAY, OHIO
A. Financial Statements for the twelve months ended
December 31, 1996
Independent Auditor's Report
Statement Assets, Liabilities, and Net
Investments and (Advances) as of December
31, 1996 and September 30, 1997 (unaudited)
Statement of Revenues and Expenses for the
year ended December 31, 1996 and the nine
months ended September 30, 1997 (unaudited)
and 1996 (unaudited)
Statement of Cash Flows for the year ended
December 31, 1996 and the nine months ended
September 30, 1997 (unaudited) and 1996
(unaudited)
Notes to Financial Statements
III. COUNTRY HEARTH INN - AUBURN, INDIANA
A. Financial Statements for the twelve months ended
December 31, 1996
Independent Auditor's Report
27
<PAGE>
Statement Assets, Liabilities, and Net
Investments and (Advances) as of December
31, 1996 and September 30, 1997 (unaudited)
Statement of Revenues and Expenses for the
year ended December 31, 1996 and the nine
months ended September 30, 1997 (unaudited)
and 1996 (unaudited)
Statement of Cash Flows for the year ended
December 31, 1996 and the nine months ended
September 30, 1997 (unaudited) and 1996
(unaudited)
Notes to Financial Statements
(c) Exhibits.
<TABLE>
Exhibit Number Description
- -------------- -----------
<S> <C>
3.1 Amended and Restated Charter of the Company (incorporated by
reference to Exhibit 3.1 to Company's Amendment No. 8 to Form
S-11 effective April 17, 1996).
3.2 Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.2 to Company's Amendment No. 8 to Form
S-11 effective April 17, 1996).
4.1 Form of Share Certificate (incorporated by reference to
Exhibit 4.1 to Company's Amendment No. 8 to Form S-11
effective April 17, 1996).
4.2 Form of Series A Warrant dated effective as of February 3,
1997 (incorporated by reference to Exhibit 4.2 to Company's
Annual Report on Form 10-K filed on March 31, 1997).
4.3 Form of Series B Warrant dated effective as of February 3,
1997 (incorporated by reference to Exhibit 4.3 to Company's
Annual Report on Form 10-K filed on March 31, 1997).
10.1 Agreement to Purchase Motel between Teacher's Retirement
System of the State of Illinois, as Seller, and Host Funding,
Inc., as Purchaser, as from time to time amended by the
parties thereto (Flagstaff, Arizona) (incorporated by
reference to Exhibit 10.1 to Company's Annual Report on Form
10-K filed on March 31, 1997).
10.2 Agreement of Sale and Purchase between Auburn Equity Partners
and Host Funding, Inc. dated May 1, 1997 (Country Hearth Inn,
Auburn, Indiana) (incorporated by reference to Exhibit 10.23
to Company's Quarterly Report on Form 10-Q filed on May 14,
1997).
28
<PAGE>
10.3 Amendment to Agreement of Sale and Purchase between Auburn
Equity Partners and Host Funding, Inc. dated effective as of
June 19, 1997 (Country Hearth Inn, Auburn, Indiana)
(incorporated by reference to Exhibit 10.4 to Company's Annual
Report on Form 10-Q filed on August 14, 1997).
10.4 Second Amendment to Agreement of Sale and Purchase between
Auburn Equity Partners and Host Funding, Inc. dated effective
as of July 28, 1997 (Country Hearth Inn, Auburn, Indiana)
(incorporated by reference to Exhibit 10.5 to Company's
Quarterly Report on Form 10-Q filed on August 14, 1997).
10.5 Third Amendment to Agreement of Sale and Purchase between
Auburn Equity Partners and Host Funding, Inc. dated effective
as of September 20, 1997 (Country Hearth Inn, Auburn, Indiana)
(incorporated by reference to Exhibit 2.4 to Company's Form
8-K filed on November 4, 1997).
10.6 Agreement of Sale and Purchase between Findlay Equity Partners
and Host Funding, Inc. dated May 1, 1997 (Country Hearth Inn,
Findlay, Ohio) (incorporated by reference to Exhibit 10.24 to
Company's Quarterly Report on Form 10-Q filed on May 14,
1997).
10.7 Amendment to Agreement of Sale and Purchase Agreement between
Findlay Equity Partners and Host Funding, Inc. dated effective
as of June 19, 1997 (Country Hearth Inn, Findlay, Ohio)
(incorporated by reference to Exhibit 10.7 to Company's
Quarterly Report on Form 10-Q filed on August 14, 1997).
10.8 Second Amendment to Agreement of Sale and Purchase between
Findlay Equity Partners and Host Funding, Inc. dated effective
as of July 28, 1997 (Country Hearth Inn, Findlay, Ohio)
(incorporated by reference to Exhibit 10.8 to Company's
Quarterly Report on Form 10-Q filed on August 14, 1997).
10.9 Third Amendment to Agreement of Sale and Purchase between
Findlay Equity Partners and Host Funding, Inc. dated effective
as of September 20, 1997 (Country Hearth Inn, Findlay, Ohio)
(incorporated by reference to Exhibit 2.6 to Company's Form
8-K filed on November 4, 1997).
10.10 Lease Summary, Country Hearth Inn, Auburn, Indiana
(incorporated by reference to Exhibit 2.8 to Company's Form
8-K filed on November 4, 1997).
10.11 Lease Summary, Country Hearth Inn, Findlay, Ohio (incorporated
by reference to Exhibit 2.9 to
Company's Form 8-K filed on November 4, 1997).
10.12 Exchange and Note Prepayment Agreement dated effective as of
September 17, 1997 by and among Host Funding, Inc. and Guy and
Dorothy Hatfield (incorporated by reference to Exhibit 10.13
to Company's Quarterly Report on Form 10-Q filed on November
7, 1997).
29
<PAGE>
10.13 Promissory Note dated March 14, 1997 from CrossHost, Inc., as
Maker, and Credit Suisse First Boston Capital LLC, as Payee,
in the principal amount of $13,000,000 (incorporated by
reference to Exhibit 10.3 to Company's Annual Report on Form
10-K filed on March 31, 1997).
10.14 Promissory Note dated March 14, 1997 from Host Ventures, Inc.
as Maker, and Credit Suisse First Boston, LLC, as Payee, in
the principal amount of $8,725,000 (incorporated by reference
to Exhibit 10.4 to Company's Annual Report on Form 10-K filed
on March 31, 1997).
10.15 Form of Mortgage and Security Agreement, dated as of March 14,
1997 by and between CrossHost, Inc., as Mortgagor, and Credit
Suisse First Boston Mortgage Capital LLC, as Mortgagee.
CrossHost and Host Ventures executed a separate Mortgage
Agreement and/or Deed of Trust for each of the hotel
properties pledged to secure the Company's revised credit
facility. The Mortgage Agreements and/or Deeds of Trust are
substantially similar except for the remedy provisions
required under the laws of the state in which the hotel
property is located in the event of a default by the
respective Mortgagor (incorporated by reference to Exhibit
10.5 to Company's Annual Report on Form 10-K filed on March
31, 1997).
10.16 Master Agreement dated September 13, 1996 by and among
CrossHost, Inc. and Crossroads Hospitality Tenant
Company, L.L.C., and Crossroads Hospitality Company,
L.L.C., (Sleep Inn Hotels) (incorporated by reference to
Exhibit 10.18 to Company's Form 8-K filed on September 30,
1996).
10.17 Master Agreement dated April 1, 1996 by and among Host
Funding, Inc. and Crossroads Hospitality Tenant Company,
L.L.C. and Crossroads Hospitality Company, L.L.C. (Super
8 Hotels) (incorporated by reference to Exhibit 10.2 to
Company's Amendment No. 8 to Form S-11 effective April 17,
1996).
10.18 Form of Lease Agreement (Super 8 Hotels) (incorporated by
reference to Exhibit 10.19 to Company's Form 8-K filed on
September 30, 1996).
10.19 Form of Lease Agreement (Sleep Inn Hotels) (incorporated by
reference to Exhibit 10.14 to Company's Form 8-K filed on
September 30, 1996).
10.20 Termination Agreement dated effective as of February 3, 1997 by
and between Host Funding, Inc. and Host Funding Advisors, Inc.
relating to termination of the Advisory Agreement (incorporated
by reference to Exhibit 10.16 to Company's Annual Report on Form
10-K filed on March 31, 1997).
10.21 Indemnity and Guaranty Agreement dated as of March 14, 1997 by
and between Host Funding, Inc. and Credit Suisse First Boston
Capital, LLC (incorporated by reference to Exhibit 10.17 to
Company's Annual Report on Form 10-K filed on March 31, 1997).
30
<PAGE>
10.22 Agreement dated February 3, 1997 by and between Host Funding,
Inc., HMR Capital, LLC and Host Funding Advisors, Inc.
(incorporated by reference to Exhibit 10.18 to Company's Annual
Report on Form 10-K filed on March 31, 1997).
10.23 Promissory Note dated December 30, 1997 from Host Funding, Inc.,
as Maker, to Blacor, Inc., as Lender, in the principal amount of
$86,600.
10.24 Promissory Note dated December 30, 1997 from Host Funding,
Inc., as Maker, to Guy and Dorothy Hatfield, as Lender, in the
principal amount of $100,000.
21.1 Subsidiaries of Registrant.
27 Financial Data Schedule.
</TABLE>
The Company will furnish copies of these Exhibits upon request and
the payment of $.20 per page. Requests should be addressed to Bona K. Allen,
c/o Host Funding, Inc., 6116 North Central Expressway, Suite 1313, Dallas,
Texas 75206.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Host Funding, Inc.
By: /s/ Michael S. McNulty
-------------------------
Michael S. McNulty
Title: President
Date: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ William M. Birdsall Chairman of the Board March 31, 1998
- -------------------------
William M. Birdsall
/s/ Michael S. McNulty President and Director March 31, 1998
- -------------------------
Michael S. McNulty
/s/ Bona K. Allen Chief Financial and March 31, 1998
- ------------------------- Accounting Officer
Bona K. Allen
/s/ Don W. Cockroft Director March 31, 1998
- -------------------------
Don W. Cockroft
/s/ Guy E. Hatfield Director March 31, 1998
- -------------------------
Guy E. Hatfield
/s/ Charles R. Dunn Director March 31, 1998
- -------------------------
Charles R. Dunn
32
<PAGE>
INDEX TO FINANCIAL STATEMENTS
HOST FUNDING, INC.
<TABLE>
<S> <C>
Report of Independent Accountants F-2
Consolidated Balance Sheet as of December 31, 1997, and 1996. F-3
Consolidated Statement of Operations for the years ended December 31, 1997
and 1996 and nine months ended December 31, 1995 F-4
Consolidated Statement of Shareholders' Equity (Deficits) for the years ended
December 31, 1997 and 1996 and nine months ended December 31, 1995 F-5
Consolidated Statement of Cash Flows for the years ended December 31, 1997
and 1996 and nine months ended December 31, 1995 F-6
Notes to Consolidated Financial Statements F-8
Schedule III - Real Estate and Accumulated Depreciation F-22
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Host Funding, Inc.
We have audited the accompanying consolidated balance sheets of Host Funding,
Inc. and subsidiaries (the ""Company'') as of December 31, 1997 and 1996 and
the related combined statements of income, shareholders' equity and cash
flows for the years ended December 31, 1997 and 1996 and the nine months ended
December 31, 1995 and the financial statement schedule included in the index
of this Form 10-K. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Host Funding, Inc. at December 31, 1997 and December 31, 1996 and the
results of its operations and its cash flows for the years ended December 31,
1997 and December 31, 1996 and the nine months ended December 31, 1995, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule referred to above, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND, L.L.P.
Dallas, Texas
March 21, 1998
F-2
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------
December 31, December 31,
1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
LAND, PROPERTY AND EQUIPMENT - AT COST:
Building and improvements $20,667,995 $12,644,239
Furnishings and equipment 3,471,336 1,952,233
Less accumulated depreciation (1,241,798) (391,009)
----------- -----------
22,897,533 14,205,463
Land 6,844,650 4,808,047
----------- -----------
Land, property and equipment - net 29,742,183 19,013,510
CASH AND CASH EQUIVALENTS 48,867 218,693
RESTRICTED CASH 557,758 128,952
RENT RECEIVABLE - CROSSROADS 115,328 223,160
DUE FROM RELATED PARTIES 19,942 30,390
LONG-TERM ADVANCES TO CROSSROADS 255,841 225,000
LOAN COMMITMENT FEES - NET 964,551 502,338
FRANCHISE FEES - NET 110,760 58,250
PREPAID AND OTHER ASSETS 180,950 35,282
----------- -----------
TOTAL $31,996,181 $20,435,575
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
LONG-TERM DEBT $25,036,346 $15,500,000
SHORT TERM DEBT 1,345,154
LONG-TERM LEASE DEPOSIT 300,000
ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES 335,645 38,354
ACCRUED INTEREST 196,053 114,886
ACCRUED PROPERTY TAXES 248,823 78,940
----------- -----------
Total liabilities 27,462,021 15,732,180
----------- -----------
MINORITY INTEREST IN PARTNERSHIPS 254,822
SHAREHOLDERS' EQUITY:
Class A Common stock, $.01 par value; authorized 50,000,000 shares; issued and
outstanding 1,535,868 shares and 1,234,049 shares at December 31, 1997 and 16,258 12,340
December 31, 1996
Class B Common stock, $.01 par value; authorized 4,000,000 shares; issued and
outstanding 0 shares and 140,000 shares at December 31, 1997 and December 31, 1996 1,400
Class C Common stock, $.01 par value; authorized 4,000,000 shares; issued and
outstanding 0 shares and 140,000 shares at December 31, 1997 and December 31, 1996 1,400
Additional Paid in Capital 8,499,876 7,501,494
Accumulated Deficit (3,134,005) (744,772)
Less: Related party note receivable (1,805,675)
Less: Unearned directors' compensation (202,792) (262,792)
----------- -----------
5,179,337 4,703,395
Less: Common stock in treasury at cost, 90,000 shares at December 31, 1997 (900,000)
----------- -----------
Total shareholders' equity 4,279,337 4,703,395
----------- -----------
TOTAL $31,996,180 $20,435,575
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
- -------------------------------------------------------------------------------
F-3
<PAGE>
HOST FUNDING, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
AND THE NINE MONTHS ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
NINE
YEAR ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
REVENUES:
Lease revenue - related party $ $ 278,453 $806,670
Lease revenue - Crossroads 3,679,355 1,262,165
Interest income - related parties 121,976 219,467 135,673
Interest income & Other income 36,019 8,698
--------------------------------------
Total revenue 3,837,350 1,768,783 942,343
--------------------------------------
EXPENSES:
Interest expense (including amortization of
loan costs) 2,375,059 780,015 322,461
Depreciation and amortization 861,031 289,098 111,099
Administrative expenses - related party 224,000 540,000
Administrative expenses - other 1,293,918 427,980
Advisory fees - related party 21,083
Property taxes 291,448 138,675
Minority Interest in Partnerships (12,592)
Amortization of unearned directors' compensation 54,000 37,208
--------------------------------------
Total expenses 4,862,864 1,918,059 973,560
--------------------------------------
LOSS BEFORE INCOME TAXES (1,025,514) (149,276) (31,217)
BENEFIT FOR INCOME TAXES (3,000)
--------------------------------------
NET INCOME (LOSS) (1,025,514) (149,276) (28,217)
--------------------------------------
--------------------------------------
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE $ (0.68) $ (0.12) $ (0.04)
--------------------------------------
--------------------------------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 1,516,652 1,244,668 690,000
--------------------------------------
--------------------------------------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
- -------------------------------------------------------------------------------
<TABLE>
Retained
Class A Class B Class C Additional Earnings
Common Common Common Paid in (Accumulated
Stock Stock Stock Capital Deficit)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1997 $12,340 $ 1,400 $ 1,400 7,501,494 $ (744,772)
COMMON STOCK ISSUED FOR ACQUIRED
PROPERTIES ACQUISITION FEE 160 - - 151,840 -
COMMON STOCK ISSUED AS DEPOSITS AND HELD
IN ESCROW SUBJECT TO THE RELATED
PURCHASE CONTRACTS (AS AMENDED) 55 49,745
PRINCIPAL REDUCTION: NOTES RECEIVABLE:
DIRECTORS
AMORTIZATION OF UNEARNED DIRECTORS
COMPENSATION - - - - -
CONVERSION OF CLASS C COMMON STOCK
TO CLASS A COMMON STOCK 1,400 - (1,400) - -
CONVERSION OF CLASS B COMMON STOCK
TO CLASS A COMMON STOCK 1,400 (1,400)
COMMON STOCK IN TREASURY AT COST (90,000 SHARES)
PRINCIPAL REDUCTION: NOTES RECEIVABLE:
HATFIELD
COMMON STOCK ISSUED AND CONTRIBUTED TO
BACHOST, L.L.C 808 749,192
COMMON STOCK ISSUED AS DEPOSIT FOR LEGAL FEE 150 97,350
REFUND OF COMMON STOCK ISSUED AS DEPOSIT
AND HELD PURSUANT TO RELATED ACQUISITION FEE (55) (49,745)
DISTRIBUTIONS ($0.90 PER SHARE) - - - - (1,363,719)
NET LOSS - - - - (1,025,514)
------- ------- ------- --------- ------------
BALANCE, December 31, 1997 $16,258 $ 0 $ 0 8,499,876 $ (3,134,005)
------- ------- ------- --------- ------------
------- ------- ------- --------- ------------
CONTRIBUTION OF NET ASSETS AND LIABILITIES
FOR COMMON STOCK AND ACCUMULATED DEFICIT ON
APRIL 1, 1995 $ 1 $ $ $ $ (305,943)
REDUCTION IN STOCK ISSUANCE COSTS 75,000
NET LOSS (28,217)
------- ------- ------- --------- ------------
BALANCE, DECEMBER 31, 1995 1 0 0 0 (259,160)
COMMON STOCK ISSUED IN PUBLIC OFFERING 3,000 2,697,000
COMMON STOCK ISSUED IN PRIVATE PLACEMENT 2,000 1,798,000
COMMON STOCK ISSUED PURSUANT TO MISSION
BAY ACQUISITION AGREEMENT 2,520 2,517,970
COMMON STOCK ISSUED TO PARTNERS OF AAG 4,099 1,400 1,400 (6,899)
COMMON STOCK ISSUED TO INDEPENDENT DIRECTORS 300 299,700
COMMON STOCK ISSUED FOR ACQUIRED PROPERTIES
ACQUISITION FEE 420 338,205
RECLASS OF STOCK ISSUANCE COSTS AGAINST
ADDITIONAL PAID IN CAPITAL (64,943) 64,943
INCREASE IN STOCK ISSUANCE COSTS (77,539)
AMORTIZATION OF UNEARNED DIRECTORS' COMPENSATION
ELIMINATION OF DEFERRED INCOME TAXES FROM
CONVERSION TO REIT 163,000
DISTRIBUTIONS PAID (564,279)
NET LOSS (149,276)
------- ------- ------- --------- ------------
BALANCE, DECEMBER 31, 1996 $12,340 $ 1,400 $ 1,400 $7,501,494 $(744,772)
------- ------- ------- --------- ------------
------- ------- ------- --------- ------------
<CAPTION>
Related Unearned Total
Party Note Directors' Treasury Shareholders'
Receivable Compensation Stock Equity(Deficit)
- ------------------------------------------------------------------------------------------------------------------
BALANCE, January 1, 1997 $(1,805,675) $(262,792) $ 0 $ 4,703,395
COMMON STOCK ISSUED FOR ACQUIRED
PROPERTIES ACQUISITION FEE - - 152,000
COMMON STOCK ISSUED AS DEPOSITS AND HELD
IN ESCROW SUBJECT TO THE RELATED
PURCHASE CONTRACTS (AS AMENDED) 49,800
PRINCIPAL REDUCTION: NOTES RECEIVABLE:
DIRECTORS 6,000 6,000
AMORTIZATION OF UNEARNED DIRECTORS
COMPENSATION - 54,000 - 54,000
CONVERSION OF CLASS C COMMON STOCK
TO CLASS A COMMON STOCK - - - 0
CONVERSION OF CLASS B COMMON STOCK
TO CLASS A COMMON STOCK 0
COMMON STOCK IN TREASURY AT COST (900,000) (900,000)
PRINCIPAL REDUCTION: NOTES RECEIVABLE: 1,805,675 1,805,675
HATFIELD
COMMON STOCK ISSUED AND CONTRIBUTED TO
BACHOST, L.L.C 750,000
COMMON STOCK ISSUED AS DEPOSIT FOR LEGAL FEES 97,500
REFUND OF COMMON STOCK ISSUED AS DEPOSIT
AND HELD PURSUANT TO RELATED ACQUISITION FEE (49,800)
DISTRIBUTIONS - - - (1,363,719)
NET LOSS - - - (1,025,514)
----------- --------- --------- -----------
BALANCE, December 31, 1997 $ 0 $(202,792) $(900,000) $ 4,279,337
----------- --------- --------- -----------
----------- --------- --------- -----------
CONTRIBUTION OF NET ASSETS AND LIABILITIES
FOR COMMON STOCK AND ACCUMULATED DEFICIT ON
APRIL 1, 1995 $(1,805,675) $ $ $(2,151,617)
REDUCTION IN STOCK ISSUANCE COSTS 75,000
NET LOSS (28,217)
----------- --------- --------- -----------
BALANCE, DECEMBER 31, 1995 $(1,805,675) 0 0 (2,064,834)
COMMON STOCK ISSUED IN PUBLIC OFFERING 2,700,000
COMMON STOCK ISSUED IN PRIVATE PLACEMENT 1,800,000
COMMON STOCK ISSUED PURSUANT TO MISSION 2,520,490
BAY ACQUISITION AGREEMENT
COMMON STOCK ISSUED TO PARTNERS OF AAG
COMMON STOCK ISSUED TO INDEPENDENT DIRECTORS (300,000)
COMMON STOCK ISSUED FOR ACQUIRED PROPERTIES
ACQUISITION FEE - 338,625
RECLASS OF STOCK ISSUANCE COSTS AGAINST
ADDITIONAL PAID IN CAPITAL
INCREASE IN STOCK ISSUANCE COSTS (77,539)
AMORTIZATION OF UNEARNED DIRECTORS' COMPENSATION 37,208 37,208
ELIMINATION OF DEFERRED INCOME TAXES FROM
CONVERSION TO REIT 163,000
DISTRIBUTIONS PAID (564,279)
NET LOSS (149,276)
----------- --------- --------- -----------
BALANCE, DECEMBER 31, 1996 $(1,805,675) $(262,792) 0 $4,703,395
----------- --------- --------- -----------
----------- --------- --------- -----------
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
F-5
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 AND 1996
AND THE NINE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------
Nine Months
Ended
1997 1996 December 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (1,025,514) $ (149,276) $ (28,217)
Adjustments to reconcile net income to net cash:
provided by operating activities
Depreciation and amortization 861,031 289,098 111,099
Deferred taxes (3,000)
Amortization of loan fees 372,772 216,500
Amortization of unearned directors' compensation 54,000 37,208
Minority interest in partnerships 12,592
Changes in operating assets and liabilities:
Rent receivable - Crossroads 107,832 (223,160)
Rent, interest and other receivable - related party 10,448 4,844
Prepaid and other assets (48,169) (14,800)
Notes Receivable: Directors 6,000
Short term debt 1,345,154
Credit given on note receivable: related party 31,397
Payment of loan fees (834,985) (697,692)
Accounts payable and accrued expenses 548,341 191,217 40,963
------------ ------------ ---------
Net cash (used in) provided by operating activities 1,440,899 (346,061) 85,611
------------ ------------ ---------
INVESTING ACTIVITIES:
Acquisition of land, property and equipment (10,435,232) (13,803,929)
Minority interest in Partnerships 254,822
Restricted cash (428,806) (128,952)
Long-term advances to Crossroads (30,841) (225,000)
Other assets (20,482)
Franchise fees (62,750) (60,000)
------------ ------------ ---------
Net cash used in investing activities (10,957,629) (14,238,363) 0
------------ ------------ ---------
FINANCING ACTIVITIES:
Proceeds from common stock issued in Stock Offering 4,500,000
Stock issuance costs (402,539) (100,000)
Cash portion of related party note receivable payment 874,278
Borrowings on long-term debt 9,682,646 15,500,000 120,000
Payments on long-term debt (146,300) (4,230,565) (105,111)
Long-term lease deposit 300,000
Distributions (1,363,719) (564,279)
------------ ------------ ---------
Net cash provided by financing activities 9,346,905 14,802,617 (85,111)
------------ ------------ ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (169,825) 218,193 500
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 218,693 500
------------ ------------ ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 48,868 $ 218,693 $ 500
------------ ------------ ---------
------------ ------------ ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for interest $ 1,271,482 $ 610,408 281,498
------------ ------------ ---------
------------ ------------ ---------
Common stock issued to independent directors
Class A common stock $ 300
Additional paid in capital 299,700
Unearned directors' compensation (300,000)
------------ ------------
Net non-cash investing activity $ 0 $ 0 $ 0
------------ ------------ ---------
------------ ------------ ---------
Common stock issued pursuant to Mission Bay
Acquisition Agreement
Land, property and equipment $ $ (2,520,490)
Class A common stock 2,520
Additional paid in capital 2,517,970
------------ ------------
Net non-cash investing activity $ 0 $ 0 $ 0
------------ ------------ ---------
------------ ------------ ---------
(Continued)
</TABLE>
F-6
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 AND 1996
AND THE NINE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------
Nine Months
Ended
1997 1996 December 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (Continued)
Non-cash investing activities:
Common stock issued to partners of AAG:
Class A common stock 4,099
Class B common stock 1,400
Class C common stock 1,400
Additional paid in capital (6,899)
------------ ------------ ------------
Net non cash investing activity $ 0 $ 0 $ 0
------------ ------------ ------------
------------ ------------ ------------
Reclass of deferred income taxes and stock issuance
cost costs due to Stock Offering
Deferred income taxes $ $ (163,000)
Additional paid in capital (64,943)
Retained Earnings 227,943
------------ ------------ ------------
Net non-cash investing activity $ 0 $ 0 $ 0
------------ ------------ ------------
------------ ------------ ------------
Common stock issued for Acquired Properties
Acquisition Fee
Additional paid in capital $ 151,840 $ 338,205
Class A Common Stock 160 420
Land, property and equipment (152,000) (338,625)
------------ ------------ ------------
Net non-cash investing activity $ 0 $ 0 $ 0
------------ ------------ ------------
------------ ------------ ------------
Conversion of Class C common stock
to Class A common stock
Class A common stock $ 1,400 $
Class C common stock (1,400)
------------ ------------ ------------
Net non-cash investing activity $ 0 $ 0 $ 0
------------ ------------ ------------
------------ ------------ ------------
Conversion of Class B common stock
to Class A common stock
Class A common stock $ 1,400 $
Class B common stock (1,400)
------------ ------------ ------------
Net non-cash investing activity $ 0 $ 0 $ 0
------------ ------------ ------------
------------ ------------ ------------
Receipt of Class A common stock in partial
payment of related party note receivable
Class A common stock held in treasury (at cost) $ 900,000 $
Related party note receivable (900,000)
------------ ------------ ------------
Net non-cash investing activity $ 0 $ 0 $ 0
------------ ------------ ------------
------------ ------------ ------------
Common stock issued and contributed to Bachost, L.L.C.
to purchase the Country Hearth Inns
Class A common stock $ 808 $
Additional paid in capital 749,192
Land, property and equipment (750,000)
------------ ------------ ------------
Net non-cash investing activity $ 0 $ 0 $ 0
------------ ------------ ------------
------------ ------------ ------------
Common stock issued as deposit for legal fees
Class A common $ 97,500 $
Deposits (97,500)
------------ ------------ ------------
Net non-cash investing activity $ 0 $ 0 $ 0
------------ ------------ ------------
------------ ------------ ------------
Contribution of net assets and liabilities for common
stock and accumulated deficit
Land, property and equipment $ $ $ 2,741,477
Loan commitment fees 28,582
Related party note receivable 1,805,675
Long term debt (4,215,676)
------------ ------------ ------------
$ 0 $ 0 $ 360,057
------------ ------------ ------------
------------ ------------ ------------
Less: Liabilities and accumulated deficit resulting
from the contribution of net assets and liabilities
Accounts payable stock issuance costs $ $ $ (500,000)
Reduction in accounts payable stock issuance costs 75,000
Deferred income taxes (166,000)
Accumulated deficit 305,943
Reduction in stock issuance costs (75,000)
------------ ------------ ------------
$ 0 $ 0 $ (360,057)
------------ ------------ ------------
$ 0 $ 0 $ 0
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
(Concluded)
F-7
<PAGE>
HOST FUNDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION:
Host Funding, Inc., a Maryland corporation ("Host Funding" or the
"Company"), was initially formed on December 22, 1994, and structured
to qualify as a Real Estate Investment Trust ("REIT"). The principal
business of the Company is to acquire and then lease limited service
and full hotels/motels. The Company owned 12 limited service hotels at
December 31, 1997. Host Funding was inactive from inception,
December 22, 1994 to March 31, 1995. Host Funding's fiscal year end is
December 31.
On April 1, 1995, Host Funding and All American Group, Ltd. a Delaware
limited partnership ("AAG"), entered into a Contribution and Assumption
Agreement (the "Contribution and Assumption Agreement"). Under the
Contribution and Assumption Agreement, AAG transferred, assigned and
conveyed to Host Funding all of the real property and Host Funding
agreed to assume stock issuance costs payable and all real property
debt, at historical cost, of four (4) Super 8 motels located and doing
business in Somerset, Kentucky; Miner, Missouri; Poplar Bluff,
Missouri; and Rock Falls, Illinois. In addition, AAG contributed a note
receivable (the "Related Party Note") ($1,805,675). In accordance with
generally accepted accounting principles, the Related Party Note was
offset against shareholder's equity as the Related Party Note was
originally issued for equity in AAG. Host Funding issued 100 shares of
common stock as consideration to AAG. As of December 31, 1995, all of
the outstanding stock of Host Funding was owned by AAG.
On April 22, 1996, Host Funding raised additional capital through an
initial public offering of Class A common stock (the "Stock Offering").
Host Funding used the capital raised from the Stock Offering to pay
down long-term debt, to pay expenses of the formation of Host Funding,
and for working capital purposes. Further, on April 22, 1996, Host
Funding acquired for a total purchase price of $2,810,000, certain
assets of Mission Bay Super 8, Ltd., a California limited partnership,
the owner of a 117 room Super 8 motel located in San Diego, California,
pursuant to an asset acquisition agreement (the "Mission Bay
Acquisition Agreement"). Host Funding exchanged 252,049 shares of
common stock at a stated value of $10.00 per share ($2,520,490) plus
cash for a reserve for dissenters rights and fractional share
settlements of approximately $290,000. See note 6. The five Super 8
Hotels located in Somerset, Kentucky; Miner, Missouri; Poplar Bluff,
Missouri; Rock Falls Illinois and San Diego, California hereinafter
shall be referred to as the "Initial Hotels".
Upon completion of the Stock Offering and the Mission Bay Acquisition
Agreement, Host Funding issued additional Class A, B and C common
shares to AAG in exchange for 100 initial shares held by AAG based upon
appraised values of Host Funding's assets net of liabilities prior to
the Stock Offering. The common shares issued upon completion of the
F-8
<PAGE>
Stock Offering include 410,000 Class A, 140,000 Class B and 140,000
Class C, which number of shares were determined based upon the net
appraised value of assets net of liabilities of $6,900,000 or $10.00
per share. The Class B and C shares included certain restrictions as to
the future payment of dividends and were convertible to Class A common
shares at certain times and under certain circumstances as defined in
the charter. The Class C common shares converted into Class A common
shares effective January 1, 1997. The Class B common shares were
redeemed for $140,000 Class A common shares pursuant to an Exchange and
Note Prepayment Agreement. See note 5.
On September 5, 1996, Host Funding formed CrossHost, Inc., a Maryland
Corporation ("CrossHost"), as a wholly-owned, special purpose, REIT
qualified subsidiary. Upon formation, CrossHost acquired four Sleep Inn
Hotels located in Destin, Sarasota, and Tallahassee, Florida and Ocean
Springs, Mississippi, pursuant to an acquisition and credit facility in
the amount of $15,500,000 (the "Initial Loan Facility") and provided by
Credit Suisse First Boston Capital, L.L.C. ("First Boston"). The
Initial Loan Facility was payable interest only, monthly, at the LIBOR
Rate plus 304.5 basis points with a maturity date of October 21, 1997.
See notes 3,6, and 7.
On March 5, 1997, Host Funding formed Host Ventures, Inc., a Maryland
corporation ("Host Ventures"), as a wholly-owned, special purpose
subsidiary of Host Funding. On March 14, 1997, CrossHost and Host
Ventures entered into the CrossHost Loan Facility totaling $13,000,000
and the Host Ventures Loan Facility totaling $8,725,000 whereby the
Initial Credit Facility was repaid totaling $15,500,000 and a 90 room
Super 8 motel in Flagstaff Arizona (the "Flagstaff Super 8") was
purchased. Additionally, on March 14, 1997 CrossHost transferred to
Host Ventures the Sleep Inn Hotels owned by CrossHost and located in
Ocean Springs, Mississippi and Sarasota, Florida.
The CrossHost Loan Facility is payable over twenty years in equal
monthly installments of $120,838, including interest at a fixed rate of
9.46% per annum (the "Base Interest Rate") over the first ten years,
with an increased fixed monthly payment the second ten years that fully
amortizes remaining principal plus interest at an interest rate equal
to the greater of 2% over the Base Interest Rate or 2% over the
then-existing ten year U.S. Treasury Note rate, with a due date in
March 2017.
The Host Ventures Loan Facility is payable interest only, monthly at
the LIBOR Rate plus 350 basis points (LIBOR Rate was 5.69141% as of
March 1, 1998), with a maturity date of April 1, 1999, at which time
all unpaid interest plus principal are due.
Effective September 17, 1997 the Company entered into an Exchange and
Note Prepayment Agreement whereby Guy and Dorothy Hatfield and All
American Group satisfied that certain Promissory Note (the "Related
Party Note") dated April 1, 1995 payable to Host Funding in the
principal amount of $1,805,675. See Note 5.
On October 21, 1997, the Company purchased from Findlay Equity
Partners, an Ohio general partnership, a Country Hearth Inn (the
"Findlay Country Hearth") located in Findlay, Ohio and from Auburn
Equity Partners, an Indiana general partnership, a Country
F-9
<PAGE>
Hearth Inn (the "Auburn Country Hearth") located in Auburn, Indiana
(collectively, the "Country Hearth Inns") for an aggregate of
approximately 150 rooms, which increases the Company's real estate
portfolio to twelve hotel properties containing approximately 921
rooms. The Company completed the purchase of the Country Hearth Inns
by forming two separate, special purpose limited partnerships with
Buckhead America Corporation, a publicly-traded hotel company
("Buckhead"). Wholly owned subsidiaries of Host Funding (Host Findlay
G.P., Inc and Host Auburn G.P., Inc) own 1% of the respective limited
partnerships and BacHost, L.L.C. (BacHost) owns 99% of each limited
partnership. Host Funding owns 81% of BacHost and Buckhead owns 19% of
Bachost. Each limited partnership has leased its respective Country
Hearth Inn to Buckhead pursuant to a separate percentage lease
agreement (collectively, the "Country Hearth Leases"). Buckhead also
manages the hotel properties and holds the franchise for each of the
Country Hearth Inns outside of the limited partnerships (collectively,
the "Country Hearth Franchise Agreements").
Unless stated otherwise, the hotel properties owned by the subsidiaries
of the Company are herein referred to as the "Company Hotels".
Host Funding is listed on the American Stock Exchange.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of Host
Funding and its wholly owned subsidiaries, an 81% ownership interest in
BacHost, and the accounts of the limited partnerships which own Country
Hearth Inns and of which BacHost owns 99%. BacHost is consolidated on a
gross basis with the minority partners' balance sheet interest
reflected separately on a net basis.
LAND, PROPERTY AND EQUIPMENT
Buildings and improvements are depreciated over useful lives of 35
years from the original historical date of acquisition using the
straight-line method. Hotel furnishings and equipment are depreciated
using primarily straight-line methods over useful lives ranging from 3
to 7 years from the original historical date of acquisition.
Host Funding periodically evaluates the carrying value of its real
estate properties to determine if circumstances exist indicating an
impairment in the carrying value. If facts or circumstances support
the possibility of impairment, the Company will prepare a projection of
undiscounted future cash flows from each individual property. In cases
when the Company does not expect to recover the carrying value, the
Company recognizes an impairment loss. No impairment has occurred as
of December 31, 1997, nor has impairment been required to be recorded
upon implementation in 1997 of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to Be Disposed Of."
F-10
<PAGE>
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as cash on hand and in banks plus
all short-term investments with a maturity, at the date of purchase, of
three months or less.
RESTRICTED CASH
Restricted cash represents cash deposited in escrow accounts under
contractual agreements for property taxes and capital improvements that
are restricted as to usage.
LOAN COMMITMENT FEES
The loan commitment fees are amortized over the terms of the loans
using the straight-line method which approximates the effective
interest rate method. Accumulated amortization of loan fees totaled
$568,000 and $195,000 as of December 31, 1997 and 1996, respectively.
FRANCHISE FEES
Franchise fees are being amortized on a straight-line basis over the
fifteen (15) year life of the franchise agreements. Accumulated
amortization of franchise fees totaled $10,240 and $1,750 as of
December 31, 1997 and 1996, respectively.
REVENUES
Host Funding recognizes lease revenue on an accrual basis over the
terms of the lease agreement.
LOSS PER SHARE
The Company adopted Statement of Financial Accounting Standards No.
128 ("SFAS 128"), Earnings Per Share ("EPS") beginning with the
Company's fourth quarter of 1997. SFAS 128 requires basic EPS to be
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period
and diluted EPS to reflect the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. All prior
period EPS data has been restated to conform to the provision of this
statement. There is no difference between basic and diluted EPS,
therefore, no reconciliation of these amounts is needed.
FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The following disclosure of estimated fair value was determined by
available market information and appropriate valuation methodologies.
However, considerable judgment is necessary to interpret market data
and develop the related estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the
amounts that could be realized upon disposition of the financial
instruments. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts.
F-11
<PAGE>
Rent Receivable - Crossroads, due from related parties, long-term
advances to Crossroads, accounts payable and accrued expenses, and
accounts payable are carried at amounts which reasonably approximate
their fair value.
The carrying value of long-term debt approximates fair value as the
related interest rate is variable and approximates market rates.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
INCOME TAXES
The primary components of the Company's deferred income tax
liabilities and assets as of December 31, 1997 were as follows:
<TABLE>
1997
<S> <C>
Deferred tax liabilities:
Depreciation $284,000
Total deferred tax liabilities $284,000
Accrued expenses $109,000
Net operating loss $499,000
Total deferred tax assets $608,000
Net deferred tax asset $324,000
Valuation allowance $(324,000)
</TABLE>
At December 31, 1997 the Company had approximately $1,249,000 of net
operating loss carryforwards, all of which will expire on December
31, 2012.
The valuation allowance for the net deferred tax asset was $324,000
as of December 31, 1997. In assessing the realizability of a
deferred tax asset, management considers whether it is more likely
than not that some portion or all of the deferred tax asset will not
be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible.
Based upon the level of historical taxable income and projections for
future taxable income over the periods which the deferred tax assets
are deductible, management believes it is more likely than not the
Company will realize the benefits of these deductible differences,
net of the existing valuation allowance at December 31, 1997.
The Company, as a requirement under the Internal Revenue Code (the
("Code") to elect REIT status, must have no more than five (5)
shareholders, who own no more than 50% of the common stock, common
stock equivalents, or other forms of equity outstanding of the
Company. The Company had expected to make an election to be treated
as a REIT under the provisions of the Code beginning with the 1996
year. As a result, the Company would not be subject to federal
income tax on its taxable income at corporate rates to the extent it
distributes annually 95% of its taxable income to its shareholders
and complies with certain other requirements. The Company did not
satisfy the REIT shareholder requirement as of June 30, 1997, and
therefore, did not elect to qualify as a REIT during the 1996 tax
year and was subject to the corporate tax provisions. However at
that date, the Company was in a net operating loss position, and
has a net deferred tax asset under SFAS 109, Accounting for Income
Taxes, that has been fully reserved. The Company's decision not to
elect REIT qualification will not adversely affect the stockholders
of the Company in that the Company will have no taxable income for
the 1997 tax year. The Company plans to continue its efforts to
qualify for REIT status effective for the 1998 tax year.
PENDING ADOPTION OF AUTHORITATIVE STATEMENT
In June 1997, Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires that
an enterprise classify items of other comprehensive income by their
nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and
additional paid-in-capital in the equity section of a statement of
financial position. SFAS 130 is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. The
Company plans to adopt SFAS 130 for the year ended December 31, 1998.
In June 1997, the FASB also issued SFAS no. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information."
SFAS 131 specifies revised guidelines for determining an entity's
operating segments and the type and level of financial information to
be disclosed. SFAS 131 changes current practice by establishing a new
framework on which to base segment reporting, including the
determining of a segment and the financial information to be disclosed
for each segment, referring to as the "management" approach. The
management approach requires that management identify "operating
segments" based on the way that management disaggregates the entity
for making internal operating decisions. SFAS 131 is effective for
fiscal years beginning after December 31, 1997, and requires
restatement of information for earlier periods. Management is
determining the segments to be disclosed and intends to adopt the
statement for the year ended December 31, 1998.
NOTE 2: REAL ESTATE INVESTMENTS
The Company's acquisition of hotel properties for the years 1997, 1996
and 1995 may be summarized as follows:
<TABLE>
Purchase Cost Number of Number
Year (in thousands) Hotel Properties of Rooms
---- -------------- ---------------- --------
<S> <C> <C> <C>
1995 $ 2,740 4 252
1996 16,664 5 430
1997 11,530 3 240
-------- ------- ---
Total $ 30,934 12 922
-------- ------- ---
-------- ------- ---
</TABLE>
F-12
<PAGE>
The purchase costs above include purchase prices as well as related
commissions and closing costs.
The hotels are located in nine (9) states and are subject to leases as
described in Note 7.
Minimum future base rents due under operating leases for the five years
ending December 31, 1998 to 2002 and thereafter are as follows:
<TABLE>
<S> <C>
1998 $ 3,649,000
1999 3,734,000
2000 3,734,000
2001 3,564,000
2002 3,479,000
Thereafter 35,964,000
-----------
Total $54,124,000
</TABLE>
F-13
<PAGE>
NOTE 3. LONG-TERM DEBT AND NOTES PAYABLE
LONG-TERM DEBT:
A summary of Host Funding and subsidiary's long-term debt as of
December 31 follows:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
First mortgage note payable, interest at
LIBOR plus 304.5 basis points, adjusted
Monthly (LIBOR was 5.53906% at December 31,
1996); payable monthly; due October 1997
(for information regarding the refinancing,
see note 7). $15,500,000
First mortgage note payable, interest at LIBOR
plus 350 basis points (LIBOR was 5.69% at
March 1, 1998), due April 1, 1999 $ 8,725,000
First mortgage note payable, interest at 9.46%
per annum, interest and principal payable in
monthly installments of $120,838, due in
March 2017. $12,863,031
First mortgage note payable, interest at 10.78%
per annum, interest and principal payable in
monthly installments of $17,405, due in
August, 2016. $ 1,772,159
First mortgage note payable, interest at 10.78%
per annum, interest and principal payable in
monthly installments of $18,402, due in
August, 2016. $ 1,676,156
----------- -----------
$25,036,346 15,500,000
----------- -----------
Less current portion $ 282,707 15,500,000
----------- -----------
$24,753,639 $ -0-
----------- -----------
----------- -----------
</TABLE>
F-14
<PAGE>
SHORT TERM DEBT/NOTES PAYABLE:
In June, 1997 the Company entered into a note payable to Blacor, Inc.
(an affiliate of Michael McNulty, President of Host Funding). The
December 31, 1997 balance is $86,600, the note has an amended maturity
date of May 1998 and accrues interest at 12%.
In December, 1997 the Company entered into a note payable to Guy and
Dorothy Hatfield. The December 31, 1997 outstanding balance is
$100,000, the note accrues interest at 12%, and is due in May, 1998.
In October, 1997 B-H Findlay L.P. ("B-H Findlay") and B-H Auburn, L.P.
("B-H Auburn") entered into notes payable to the sellers of the Country
Hearth Inn located in Findlay, Ohio and the Country Hearth Inn located
in Auburn, Indiana, respectively (collectively, the "Country Hearth
Notes"). The notes have December 31, 1997 outstanding balances in the
amounts of $651,111 and $487,442 respectively. The Company is the
beneficial owner of 81% of both B-H Findlay and B-H Auburn. Interest
accrual commences on January 1, 1998 at the rate of the Wall Street
Journal Prime Rate plus 1% per annum. No payments are due under the
Country Hearth Notes until April 1, 1998, at which time all outstanding
principal and interest balances are due. The Company, on behalf
of the limited partnerships, is currently in negotiation with the
holders of the Country Hearth Notes to extend the maturity date of such
notes. The Company pledged an aggregate of 90,000 shares (51,660
shares for Findlay, Ohio and 38,348 shares for Auburn, Indiana) of
the Class B Common Stock of the Company to secure payment of the
Country Hearth Notes. In addition, the Company executed a corporate
guaranty pursuant to which the Company guarantees the performance
of the obligations of each of the limited partnerships under the
Country Hearth Notes.
In October, 1997 B-H Findlay and B-H Auburn each executed notes payable
to Buckhead America Corporation ("Buckhead") with December 31, 1997
balances of $10,000 each. These notes accrue interest at the rate of 8%
per annum; no payments are due until April 1, 1998, at which time all
outstanding interest and principal are due. The company is currently in
negotiation with Buckhead to extend the maturity of such note.
NOTE 4. SHAREHOLDERS' EQUITY
Host Funding is authorized to issue 55,000,000 shares of common stock,
consisting of 50,000,000 shares of Class A common stock, $.01 par value
per share, and 4,000,000 shares of Class B common stock, $.01 par value
per share and 1,000,000 shares of Class C common stock, $.01 par value
per share.
Upon consummation of the Stock Offering and Mission Bay Acquisition
Agreement, Host Funding sold to each independent director then in
office 10,000 shares of Class A common stock at a price per share equal
to $10 per share. The purchase price ($300,000) was paid through the
delivery of a five year promissory note executed in favor of Host
Funding by each purchaser, which bears interest, payable quarterly, at
a fixed rate equal to 7% per annum. Principal payments totaling 2% of
the original principal are due annually. The shares of common stock
purchased by each independent director are pledged to Host Funding to
collateralize payment of the promissory note, which is non-recourse to
the maker, except to 10% of the principal amount due from directors.
Host Funding has agreed
F-15
<PAGE>
to forgive the promissory notes issued in exchange for the shares of
common stock in increments of 18% of the principal amount per annum
for each year that the maker remains a director of Host Funding. The
estimated annual amortization of unearned director's compensation is
expected to total $54,000 based upon the issuance of a total of 30,000
shares to three directors. Interest income - related party, paid or
accrued by the directors, to Host Funding totaled $121,976.11 for the
year ended December 31, 1997. As of December 31, 1997, $1,411.65
remains payable to Host Funding and is included in Due From Related
Parties.
Host Funding also has 20,000,000 authorized preferred shares, $.01 par
value, none of which are issued or outstanding.
Please refer to Note 1, Organization and Summary of Significant
Accounting Policies, for information regarding common stock issued as a
result of the Stock Offering and the Mission Bay Acquisition Agreement.
Also, refer to Note 5, Related Party Transactions, for information
regarding common stock issued under the Post-Formation Acquisition
Agreement as a result of the purchase of additional hotel properties by
the Company.
NOTE 5. RELATED PARTY TRANSACTIONS
RELATED PARTY NOTE RECEIVABLE:
As described in note 1, on April 1, 1995, AAG, as part of the
Contribution and Assumption Agreement, contributed the Related Party
Note to Host Funding The balance of the Related Party Note as of
December 31, 1996 was $1,805,675. The Company entered into an Exchange
and Note Prepayment Agreement (the "Note Prepayment Agreement")
effective as of September 17, 1997 whereby Guy and Dorothy Hatfield
(the "Hatfields") and All American Group, Ltd. satisfied the Related
Party Note. The amount was partially satisfied by payment of $874,325
in cash, and a $31,350 credit from the Company. Additionally, the
Company issued to the Hatfields 140,000 shares of the Company's Class A
Common Stock in exchange for the 140,000 shares of Class B Common Stock
held by the Hatfields. Simultaneously with the cash payment of
$874,325, and the exchange of the shares of Class B Common Stock
described above, the Hatfields delivered to the Company 90,000 shares
of the 140,000 shares of Class A Common Stock received by the Hatfields
in the exchange. The Company accepted the 90,000 shares of Class A
Common Stock in full and final payment of the remaining $900,000
principal balance of the Related Party Note.
RELATED PARTY ADVISORY AGREEMENT:
Host Funding entered into an Advisory Agreement (the "Advisory
Agreement") with Host Funding Advisors, Inc., a Delaware corporation
(the "Advisor") on the close of the Stock Offering. The Advisor was
formed on June 23, 1994. Pursuant to the Advisory Agreement, the
Advisor provided information, advice, assistance, and facilities to
Host Funding in connection with Host Funding's investment in hotel
properties. Additionally, the Advisor administered the daily operations
of Host Funding, negotiated on Host Funding's behalf,
F-16
<PAGE>
acted as agent for Host Funding in collecting funds and paying debts,
and generally managed and operated Host Funding. In consideration for
such services, Host Funding compensated the Advisor in the amount of
$30,000 per year. The Advisor was an affiliate of Ian Gardner-Smith,
a director and officer of CrossHost, and Michael S. McNulty, a director
and president of Host Funding and CrossHost. Advisory fees totaling
$21,083 were paid or accrued during the calendar year ended December
31, 1996. Effective January 31, 1997, the Advisory Agreement was
canceled for payment of a fee of $30,000 at which time Host Funding
became self-administered.
RELATED PARTY ACQUISITION AGREEMENT:
Host Funding entered into a Post-Formation Acquisition Agreement (as
amended, the "Acquisition Agreement") with HMR Capital, LLC, a Delaware
limited liability company, (the "Acquisition Company") on April 22,
1996.
The Acquisition Company is an affiliate of Michael S. McNulty and Ian
Gardner-Smith. Under the terms of the Acquisition Agreement, the
Acquisition Company was responsible for the management, coordination,
and supervision of Host Funding's acquisition of additional hotel
properties. The Acquisition Company was entitled to receive an
acquisition fee of no less than 2% and up to 6% of the gross purchase
price of the Acquired Properties, subject to the 30 day cancellation
provision, plus reimbursement of certain expenses (the "Acquired
Properties Acquisition Fee).
On February 3, 1997, the Registrant and HMR Capital, LLC, a Delaware
limited liability company formerly known as Host Acquisition Group, LLC
("the Acquisition Company"), entered into a Restated and Amended
Acquisition Agreement (the "Acquisition Agreement") which redefined the
role of the Acquisition Company in the coordination and supervision of
the Company's acquisition of hotel properties and allowed cancellation
with thirty (30) days written notice from either party. The Company
delivered notice to the Acquisition Company on August 5, 1997 canceling
the Acquisition Agreement effective thirty (30) days after the date of
receipt of the termination letter by the Acquisition Company (the
"Termination Date"). Any properties submitted to the Company by the
Acquisition Company prior to the Termination Date will be subject to
the terms and conditions of the Acquisition Agreement, if the Company
acquires such properties within one year from the Termination Date.
OTHER RELATED PARTY TRANSACTIONS:
Hatfield Inn is the owner and operator of a 40 room motel adjacent to
Host Funding's property located in Miner, Missouri. Host Funding and
Hatfield Inn have a shared parking agreement allowing cars to park in
either property's parking facilities, compete for similar business, and
are managed by the general partner of AAG.
The total fees received by affiliates relating to the acquisition of
the Acquired Properties, including loan origination fees, the Acquired
Properties Acquisition Fee and the expense reimbursement, totaled
approximately $591,125 and $56,250 for the years ended December 31,
1996 and 1997, respectively.
F-17
<PAGE>
NOTE 6. ACQUISITIONS
The following unaudited pro forma information has been prepared
assuming that the acquisition of Mission Bay and the Acquired Hotels
has occurred at the beginning of the periods presented. Permitted pro
forma adjustments include only the effects of events directly
attributable to a transaction that are factually supportable and
expected to have continuing impact. Pro forma adjustments reflecting
anticipated "efficiencies" in operations resulting from a transaction
are, under most circumstances, not permitted. As a result of the
limitations imposed with regard to the types of permitted pro forma
adjustments, Host Funding believes that this unaudited pro forma
information is not indicative of future results of operations, not the
results of historical operations had the acquisition of Mission Bay and
the Acquired Properties been consummated as of the assumed dates.
(Unaudited) (Unaudited)
Year Ending Year Ending
December 31, December 31,
1997 1996
------------ ------------
Revenues $ 4,391,000 $ 4,475,000
Net Income $(1,244,000) $(1,150,000)
Basic and Diluted Loss Per Share $ (0.81) $ (0.75)
Weighted Average Number of
Common Shares Outstanding 1,535,868 1,535,868
NOTE 7. COMMITMENTS AND CONTINGENCIES
REIT STATUS:
Host Funding, as a requirement under the Code to elect REIT status,
must have no more than five (5) shareholders, own no more than 50% of
the common stock, common stock equivalents, or other forms of equity
outstanding. Host Funding has not met this requirement as of December
31, 1997. Under the Code, Host Funding is allowed a six month exemption
after the tax year in which the election is to be effective to meet the
requirement. While management at Host Funding intends to meet the Code
requirements, no assurance can be given that REIT status will be
maintained, which could preclude Host Funding from electing REIT status
in the future.
PERCENTAGE LEASE AGREEMENTS:
The Company Hotels are leased by separate lease agreements (the
"Percentage Leases"). Excluding the two Country Hearth Inns, all of the
Company Hotels are leased to Crossroads Hospitality Tenant Company, LLC
("Crossroads") as lessee, and are further subject to Master Agreements
among the Company, Crossroads and Crossroads Hospitality Company, LLC
("Crossroads Hospitality"). 75% of Crossroads' voting interest are
owned by
F-18
<PAGE>
Crossroads Hospitality; each of Crossroads and Crossroads hospitality
is controlled by Interstate Hotels Corporation, a publicly held,
nation wide operator and manager of hotel properties. The Country
Hearth Inns are managed and leased by Buckhead America Corporation, as
lessee, pursuant to separate lease agreements.
Each Percentage Lease has an initial term of not less than fifteen
years, subject to earlier termination upon the occurrence of certain
contingencies. The lessees are required to pay base and percentage
rents and are entitled to all profits from the operations of the
Company Hotels after the payment of certain specified operating
expenses. The Company is required to set aside replacement reserve
amounts of 4% to 6% of gross room revenues to be used for capital
expenditures which generally must be jointly approved by the Company
and the lessee. Through December 31, 1997, the total amount due under
this provision equals approximately $440,000, $256,000 of which
has been funded at December 31, 1997.
FRANCHISE AGREEMENTS:
Host Funding has been granted franchise license agreements from Super 8
and Sleep Inns for terms expiring in 2005 and 2011, respectively.
Pursuant to the terms of the agreement, Host Funding is required to pay
royalty fees and advertising fees of 5% to 4% and 3% to 1.3%,
respectively, and reservation fees due under the Sleep Inn agreements
of 1.75%, of gross room revenue. The responsibility for payment of the
fees has been assigned to Crossroads under the Combined Leases.
TERMINATION OF ADVISORY AGREEMENT, AMENDMENT OF ACQUISITION AGREEMENT
AND ISSUANCE OF WARRANTS:
On February 3, 1997, Host Funding entered into an Agreement with the
Acquisition Company and the Advisor whereby the Acquisition Company and
Host Funding agreed to amend the Acquisition Agreement and the Advisor
and Host Funding terminated the Advisory Agreement (see note 5).
As compensation to the Acquisition Company for amending the Acquisition
Agreement allowing a thirty (30) day cancellation, Host Funding has
agreed to issue 225,000 Series A Warrants (the "Series A Warrants") and
225,000 Series B Warrants (the "Series B Warrants") to the Acquisition
Company.
The Series A Warrants provide warrants to purchase 225,000 shares of
Host Funding's Class A Common Stock, $0.01 par value per share, at
$9.90 per share, and expire on February 2, 2000. There are additional
provisions in the Series A Warrants that allow pari passu treatment
upon recapitalization of Host Funding.
The Series B Warrants provide warrants to purchase 225,000 shares of
Host Funding's Class A Common Stock, $0.01 par value per share, at
$10.80 per share, and expire on February 2, 2001. There are additional
provisions in the Series B Warrants that allow pari passu
F-19
<PAGE>
treatment upon recapitalization of Host Funding and certain
restrictions with the first twenty-four months of issuance as to the
price allowed upon exercise of the Series B Warrants based upon
consummation of a public offering in which proceeds to Host Funding
are not less than $50 million.
EMPLOYMENT AGREEMENTS:
Host Funding has entered into Employment Agreements (the "Employment
Agreements") with William Birdsall, Chairman of the Board; Michael S.
McNulty, President; and Bona K. Allen, Chief Financial Officer, for a
term of three years from February 1997. The Employment Agreements
provide for base salaries of $291,000 with a minimum bonus of 15% up to
a maximum of 50%, based upon a prescribed formula in the Employment
Agreements, of base compensation in the first year. The Employment
Agreements also provide for base salary increases based upon prescribed
increases in Host Funding's asset size. The Employment Agreements are
terminable by Host Funding, for cause, upon thirty (30) days written
notice, or upon death or disability, with severance payments due
employees ranging from nothing or two years of current base salary then
in effect.
HOST FUNDING, INC. 1997 INCENTIVE PLAN:
At the Annual Meeting of the Stockholders of Host Funding, Inc., the
Stockholders approved the Host Funding, Inc. 1997 Incentive Plan (the
"1997 Plan") pursuant to which certain individuals, including officers
and directors of the Company, may be granted awards for incentive stock
options, non-statutory stock options, stock awards, performance shares
and incentive awards. No such awards have been awarded for the year
ended December 31, 1997.
REPAIRS TO SLEEP INN PROPERTIES LOCATED IN SARASOTA AND DESTIN, FLORIDA
The Company is evaluating certain required repairs to the Sleep Inn
properties located in Sarasota and Destin, Florida. The cost of these
repairs has not been determined, but the Company does not anticipate
any reduction in the valuation of these properties. The Company has
received a notice of potential default relating to these repairs from
the franchiser and expects to achieve compliance with the Franchise
Agreements as repairs are completed.
YEAR 2000 ISSUE
The Company has addressed the "Year 2000 Problem", in which certain
electronic systems may be affected by the turn of the millenium.
Management has determined that the company's accounting software is
Year 2000 compliant. Management is evaluating the level of compliance
of other systems utilized by the Company, but does not anticipate a
material effect on its financial condition or results of operations.
F-20
<PAGE>
NOTE 8. SUBSEQUENT EVENTS
TERMINATION OF CROSSROADS AS LESSEE; LETTER OF INTENT TO SELL
LEASING/MANAGEMENT RIGHTS TO BUCKHEAD
The Company has agreed with Crossroads to terminate, during the
second quarter of 1998, all of the lease agreements, including the
Master Agreements, relating to Company Hotels leased by Crossroads.
The Company has entered into a letter of intent whereby, upon
termination of the lease agreements with Crossroads, the Company
and Buckhead will enter into new lease agreements or management
agreements with respect to all of the Company Hotels currently
leased to Crossroads. The Company anticipates that the new lease
agreements will contain substantially the same terms as the current
lease agreements with Crossroads. Buckhead will pay the Company
approximately $900,000 in cash and restricted Buckhead stock for
the right to lease or manage the Company hotels previously leased
by Crossroads. The payment by Buckhead to the Company is net of
the termination costs due to Crossroads.
COMMITMENT LETTER FOR ADDITIONAL FINANCING
The Company and Credit Suisse First Boston Capital LLC ("First
Boston") are currently negotiating a loan commitment agreement in
which First Boston would agree to refinance the $8,725,000 loan
outstanding and owed by Host Ventures, Inc. to First Boston. The
current loan will be satisfied by a long term loan facility with a
term of 10 years (20 year amortization) and annual interest rate of
approximately 7.8%. Additionally, First Boston would also agree to
provide a loan facility in the amount of $1.0 million with a 2 year
term and interest paid monthly at an annual rate of LIBOR plus 550
basis points.
LETTERS OF INTENT TO PURCHASE FLORIDA HOTEL PROPERTIES
The Company has entered into letters of intent to purchase two
properties located in Port Richie and Clearwater, Florida (the
"Florida Hotels") for an aggregate purchase price of $14.1 million.
The Florida Hotels are Holiday Inn Express brands and consist of
an aggregate of approximately 257 rooms.
1998 OPERATIONS
Management believes that, based upon the above subsequent events
and internal forecasts of the Company, adequate sources will be
available to fund the 1998 operations and obligations of the
Company.
F-21
<PAGE>
HOST FUNDING, INC.
REAL ESTATE AND ACCUMULATED DEPRECIAITON
SCHEDULE III December 31, 1997
<TABLE>
Costs Subsequent
Initial Cost to Company to Acquisition
------------------------- --------------------------
Buildings and Buildings and
Description Encumbrances Land Improvements Land Improvements
- ----------- ----------- ---------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Hotel Assets:
Super 8, Rock Falls, IL $ (A) $ 131,627 $ 491,711 $ $
Super 8, Somerset, KY (A) 170,000 449,541
Super 8, Miner, MO (A) 187,660 461,494
Super 8, Poplar Bluff, MO (A) 153,000 410,515 2,855
Super 8, San Diego, CA (A) 702,500 1,826,500 41,610
Sleep Inn, Ocean Springs, MS (B) 924,162 2,402,821 5,741
Sleep Inn, Destin, FL (A) 993,429 2,582,915 9,956
Sleep Inn, Sarasota, FL (B) 834,990 2,170,975 65,572
Sleep Inn, Tallahassee, FL (A) 710,679 1,847,767 64,339
Super 8, Flagstaff, AZ (B) 1,321,800 3,436,680 7,152
Country Hearth Inn, Findlay, OH 1,676,155 483,395 2,053,380 23,452
Country Hearth Inn, Auburn, IN 1,772,159 231,408 2,287,655 25,364
----------- ---------- ----------- ----------- -----------
$25,036,346 $6,844,650 $20,421,954 $ $ 246,041
----------- ---------- ----------- ----------- -----------
----------- ---------- ----------- ----------- -----------
<CAPTION>
Gross Amount at which
Carried at close of period
-------------------------- Accumulated
Buildings and Depreciation & Year of Date
Description Land Improvements Amortization Construction Acquired Life
- ----------- ---------- ------------- -------------- ------------ -------- ----
<S> <C> <C> <C> <C> <C> <C>
Hotel Assets:
Super 8, Rock Falls, IL $ 131,627 $ 491,711 $ 63,237 1985 4/1/95 35
Super 8, Somerset, KY 170,000 449,541 64,703 1985 4/1/95 35
Super 8, Miner, MO 187,660 461,494 68,214 1985 4/1/95 35
Super 8, Poplar Bluff, MO 153,000 413,370 61,847 1985 4/1/95 35
Super 8, San Diego, CA 702,500 1,868,110 124,056 1987 4/22/95 35
Sleep Inn, Ocean Springs, MS 924,162 2,408,562 125,349 1995 9/19/96 35
Sleep Inn, Destin, FL 993,429 2,592,871 126,231 1992 9/13/96 35
Sleep Inn, Sarasota, FL 834,990 2,236,547 106,412 1993 9/13/96 35
Sleep Inn, Tallahassee, FL 710,679 1,912,106 90,613 1994 9/13/96 35
Super 8, Flagstaff, AZ 1,321,800 3,443,832 80,647 1985 3/14/97 35
Country Hearth Inn, Findlay, OH 483,395 2,076,832 13,220 1988 10/21/97 35
Country Hearth Inn, Auburn, IN 231,408 2,313,019 14,731 1987 10/21/97 35
---------- ----------- ----------
$6,844,650 $20,667,995 $ 939,260
----------
----------
Land 6,844,650
Furniture and equipment 3,471,336 302,538
----------- ----------
$30,983,981 $1,241,798
----------- ----------
----------- ----------
</TABLE>
(A) Crosshost hotel assets are cross collateralized and encumbered by the
Crosshost Loan Facility. The outstanding principal balance at December 31, 1997
was $12,863,031
(B) Host Ventures hotel assets are cross collateralized and encumbered by the
Host Ventures Loan Facility. The outstanding principal balance at December 31,
1997 was $8,725,000
F-22
<PAGE>
PROMISSORY NOTE
$86,595.00 December 30, 1997
1. FOR VALUE RECEIVED, Host Funding, Inc., a Maryland Corporation,
("Maker"), promises to pay to the order of Blacor, Inc., a Texas Corporation
("Lender"), at 25 Highland Park Village, Box 100-530, Dallas, Texas 75205 (or
such other place for payment designated by Lender), amounts advanced under the
note, not to exceed EIGHTY-SIX THOUSAND FIVE HUNDRED AND NINETY-FIVE DOLLARS
($86,595.00), with interest from the date of advances on the principal balance
from time to time remaining unpaid at the rates hereinafter set forth. All
unpaid amounts hereof after default, and upon maturity, whether upon the due
date, by acceleration or otherwise, shall bear interest from the date of default
or maturity until paid at the lessor of (i) the highest rate permitted by
applicable law from time-to-time in effect so long a the debt evidenced hereby
is outstanding, or (ii) 18% per annum.
2. This Promissory Note (this "Note") shall bear interest and be repaid as
follows:
(a) This Note shall bear interest at a rate per annum equal to
the lesser of (i) the highest rate permitted by applicable law from time to time
in effect so long as the debt evidenced hereby is outstanding, or (ii) 12%.
(b) The principal of this Note and all accrued interest
thereon shall be due and payable on demand, but in the event no earlier demand
is made, on May 31, 1998.
3. In the event that default is made in the payment of any amounts payable
hereunder, and such default remains uncured for a period of five (5) days or
more after Lender has given written notice of such default to Maker, the entire
unpaid amount of this Note, together with accrued but unpaid interest thereon,
shall become due and payable, without further notice, and without further
presentment or demand for payment.
4. If Lender declares the entire amount of this Note at once due and
payable, as provided in Paragraph 3 above, and this Note is placed in the hands
of an attorney for collection, or suit is brought on same, or the same is
collected through probate, bankruptcy or other judicial proceedings, then Maker
shall pay to Lender all reasonable costs and expenses of collection, including
reasonable attorneys' fees, incurred by Lender in connection therewith.
5. Except as otherwise provided herein, Maker, and all endorses, if any,
expressly waive demand for payment, presentation for payment, notice of
intention to accelerate maturity, notice of acceleration, protest and notice of
protest as to this Note.
6. This Note may be prepaid, upon at least one (1) days advance written
notice, in part from time-to-time, or in full, without penalty, premium, or fee
of any kind.
<PAGE>
7. It is the intention of the Lender and Maker to conform strictly with
applicable usury laws now in force. No provision of this Note or in any other
document evidencing, securing or pertaining to the indebtedness evidenced hereby
shall require the payment, or permit the collection of, interest in excess of
the maximum amount permitted by applicable state or federal law. If at any time
the interest received or contracted for exceeds the maximum lawful rate, the
Lender shall refund the amount of the excess, or shall credit the amount of the
excess against amounts owing hereunder and such excess shall not be considered
the payment of interest. Determination of the rate of interest shall be made by
amortizing, prorating, allocating and spreading in equal parts during the full
term of this Note all interest at any time contracted for, charged or received
from Maker in connection herewith.
8. This note replaces the promissory note dated June 19, 1997 and includes
accrued interest of $1,595 from June 19, 1997 through December 30, 1997.
9. Lender shall have the option to either receive payment in cash or stock
at a price equal to 95% of the stock price at the close of business on December
30, 1997.
10. Any notice under this Note shall be in writing and shall be effective
when actually delivered or, if mailed, shall be deemed effective three (3) days
after being deposited in the United States mail, first class, certified mail,
postage prepaid, directed to the addresses show immediately below. Any party may
change its address for notices under this Note by giving formal written notice
to the other parties, specifying that the purpose of the notice is to change the
party's address. For notice purposes, addresses are as follows:
Lender Maker
------ -----
Blacor, Inc. Host Funding, Inc.
25 Highland Park Village 6116 N. Central Expressway
Box 100-530 Suite 1313
Dallas, Texas 75205 Dallas, Texas 75206
Executed this 30th day of December 1997.
By: Host Funding, Inc.
By: /s/ Bona K. Allen
-----------------------------
Bona K. Allen
Chief Financial Officer
2
<PAGE>
PROMISSORY NOTE
$100,000.00 December 30, 1997
1. FOR VALUE RECEIVED, Host Funding, Inc., a Maryland Corporation,
("Maker"), promises to pay to the order of Guy Hatfield ("Lender"), at 6116 N.
Central Expressway, Suite 1313, Dallas, Texas 75206 (or such other place for
payment designated by Lender), amounts advanced under the note, not to exceed
ONE HUNDRED THOUSAND DOLLARS ($100,000.00), with interest from the date of
advances on the principal balance from time to time remaining unpaid at the
rates hereinafter set forth. All unpaid amounts hereof after default, and upon
maturity, whether upon the due date, by acceleration or otherwise, shall bear
interest from the date of default or maturity until paid at the lessor of (i)
the highest rate permitted by applicable law from time-to-time in effect so long
a the debt evidenced hereby is outstanding, or (ii) 18% per annum.
2. This Promissory Note (this "Note") shall bear interest and be repaid as
follows:
(a) This Note shall bear interest at a rate per annum equal to
the lesser of (i) the highest rate permitted by applicable law from time to time
in effect so long as the debt evidenced hereby is outstanding, or (ii) 12%.
(b) The principal of this Note and all accrued interest
thereon shall be due and payable on demand, but in the event no earlier demand
is made, on May 31, 1998.
3. In the event that default is made in the payment of any amounts payable
hereunder, and such default remains uncured for a period of five (5) days or
more after Lender has given written notice of such default to Maker, the entire
unpaid amount of this Note, together with accrued but unpaid interest thereon,
shall become due and payable, without further notice, and without further
presentment or demand for payment.
4. If Lender declares the entire amount of this Note at once due and
payable, as provided in Paragraph 3 above, and this Note is placed in the hands
of an attorney for collection, or suit is brought on same, or the same is
collected through probate, bankruptcy or other judicial proceedings, then Maker
shall pay to Lender all reasonable costs and expenses of collection, including
reasonable attorneys' fees, incurred by Lender in connection therewith.
5. Except as otherwise provided herein, Maker, and all endorses, if any,
expressly waive demand for payment, presentation for payment, notice of
intention to accelerate maturity, notice of acceleration, protest and notice of
protest as to this Note.
6. This Note may be prepaid, upon at least one (1) days advance written
notice, in part from time-to-time, or in full, without penalty, premium, or fee
of any kind.
<PAGE>
7. It is the intention of the Lender and Maker to conform strictly with
applicable usury laws now in force. No provision of this Note or in any other
document evidencing, securing or pertaining to the indebtedness evidenced hereby
shall require the payment, or permit the collection of, interest in excess of
the maximum amount permitted by applicable state or federal law. If at any time
the interest received or contracted for exceeds the maximum lawful rate, the
Lender shall refund the amount of the excess, or shall credit the amount of the
excess against amounts owing hereunder and such excess shall not be considered
the payment of interest. Determination of the rate of interest shall be made by
amortizing, prorating, allocating and spreading in equal parts during the full
term of this Note all interest at any time contracted for, charged or received
from Maker in connection herewith.
8. At Lender's options, the note may be repaid in cash or stock at 95% of
the market price at the close of business on December 30, 1997.
9. Any notice under this Note shall be in writing and shall be effective
when actually delivered or, if mailed, shall be deemed effective three (3) days
after being deposited in the United States mail, first class, certified mail,
postage prepaid, directed to the addresses show immediately below. Any party may
change its address for notices under this Note by giving formal written notice
to the other parties, specifying that the purpose of the notice is to change the
party's address. For notice purposes, addresses are as follows:
Lender Maker
------ -----
Guy Hatfield Host Funding, Inc.
6116 N. Central Expressway 6116 N. Central Expressway
Suite 1313 Suite 1313
Dallas, Texas 75206 Dallas, Texas 75206
Executed this 30th day of December 1997.
By: Host Funding, Inc.
By: /s/ Bona K. Allen
-------------------------------
Bona K. Allen
Chief Financial Officer
2
<PAGE>
LIST OF SUBSIDIARIES
STATE OF INCORPORATION
NAME OR ORGANIZATION
Crosshost, Inc. Maryland
Host Ventures, Inc. Maryland
Host Findlay G.P., Inc. Maryland
Host Auburn G.P., Inc. Maryland
BacHost, L.L.C. Texas
BH - Findlay, L.P. Ohio
BH - Auburn, L.P. Indiana
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JAN-01-1997
<CASH> 49
<SECURITIES> 0
<RECEIVABLES> 391
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 440
<PP&E> 30,934
<DEPRECIATION> (1,241)
<TOTAL-ASSETS> 31,996
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0
0
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